Investment General Market Conditions 3 September 2013 Pent-up demand in investments could boost euro area growth The euro area has finally moved out of recession and at this stage pent-up demand could become a major contributor to a recovery. However, there is rather limited pent-up demand in private consumption. Hence, we do not expect a significantly higher growth rate due to unleashed consumption but the contribution to growth should be modest. On the other hand, the amount of pent-up demand in business investment is considerable. Enterprises have saved and held back investments for almost five years and the return of confidence should imply that postponed investments are initiated. We predict investments to have a positive contribution to growth of 0.3pp annually during 2014. However, previous years postponed investments give an upside risk to our forecast and could imply a boost to growth in 2014. Among the four biggest countries of the euro area the amount of pent-up demand in investments is most pronounced where the crisis hit hardest, but postponed investments in the core countries are expected to be initiated faster. Growth supported by domestic demand 3 % q/q AR % q/q AR Private consumption >> 1-1 -3-5 -7 << Investment 05 06 07 08 09 10 11 12 13 14 GDP >> Pent-up demand in investments could boost growth 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0-2.5-3.0 Significant pent-up demand in business investments The euro area has finally moved out of recession and we predict low but increasing growth throughout our forecast horizon, see The Big Picture: Global growth shifts to a higher gear, August 2013. The recovery will be supported by global growth, but domestic demand is also expected to have a positive impact as consumer and business confidence have started to return. Both private consumption and investments are likely to increase throughout our forecast horizon. For business investments we predict a pick-up from previous years drag on growth and there is an upside risk to our forecast due to almost five years of postponed investments. The increase in private consumption, on the other hand, should be more muted as the amount of pent-up demand is limited. There is significant pent-up demand in investment excluding dwelling. Enterprises have increased their savings and held back investment for almost five years since Lehman collapsed. Recent surveys indicate that around 40% of German SMEs have postponed investment and adopted a wait-and-see attitude mainly due to euro area uncertainty. This is likely to be the case for SMEs in other countries as well. The postponement of business investments is reflected in the non-residential investment ratio to GDP, which is 1.4pp below the centred long-term average. The improvement in business confidence together with a stronger outlook for euro area growth and consumption should imply that postponed investments are initiated and this should result in higher growth in investments. Since 2008 the average drag on euro area growth from fixed investments ex dwellings amounted to 0.6pp annually and in Q1 13 the negative impact on growth was 0.3pp q/q. Looking ahead, we predict total investments to have a positive contribution to growth of 0.3pp annually in 2014. But previous years postponed investments give an upside risk and could imply a boost to growth. Note: The long term averages are calculated as a centred moving average running over 15 years. Contribution to growth from investments turns positive Analyst Pernille Bomholdt Nielsen +45 45 13 20 21 perni@danskebank.dk Important disclosures and certifications are contained from page 4 of this report.
Differences in business investments across countries Across the four biggest countries of the euro area the amount of pent-up demand in business investments is most pronounced in the countries where the crisis hit the hardest. In Spain and Italy, the ratio of investment ex dwellings to GDP is below the centred long-term average. In Spain the deviation is 2.5pp and in Italy it is correspondingly 1.8pp below the average. This suggests that as business confidence improves in the periphery countries and the growth outlook becomes better postponed investments will have a positive impact on growth. Since 2008 the annual average drags on growth from nonresidential investments in Spain and Italy amounted to 1.9% and 1.1%, respectively, and indicate that the return of business confidence is crucial for a return to growth. However, it might take some time for investments to be initiated and the release of pent-up demand is expected after our forecast horizon, which ends in 2014. In Germany and France, there is also pent-up demand and the deviation from the longterm average for business investments is 0.9pp and 0.6pp, respectively. Germany especially has made more progress in terms of a return of business confidence compared to Italy and Spain and the pent-up demand could be released faster. Even though German pent-up demand has not been unleashed yet, the return of confidence has resulted in a contribution to growth from business investments of 0.1pp q/q in Q2 from a drag of 0.3pp in Q1. Limited pent-up demand in private consumption The amount of pent-up demand in private consumption seems rather limited. The household saving rate increased slightly at the beginning of the crisis but has been on a downward trend since 2010 as private consumption increased faster than disposable income. As growth returns the saving rate is likely to increase again towards its long-term average, reflecting lower growth in private consumption than in disposable income. The downward trend, to some extent, reflects that those affected by unemployment have been forced to lower their saving rate radically due to reduced disposable income. In Italy and Spain, gross disposable income has declined or moved sideways since 2008, whereas it has increased in Germany and France. This is also reflected in the countries saving rates, which are below the long-term average in Spain and Italy, around the average in France and just above average in Germany. The differences across countries suggest some pent-up demand in the countries that were least affected by the crisis, but the amount should be rather limited. There might be a considerable amount of retained consumption for major new purchases like cars and durable goods as they are 21% and 18% below the average since 1990, respectively. The pent-up demand for cars will also be growth supportive through the production channel as Europe produces around 20% of global auto production. Most pent-up demand in business investments in Italy and Spain Note: The long term averages are calculated as a centred moving average running over 12 years. Little pent-up demand in consumption Source: Eurostat Differences across countries Source: Eurostat Investments above average during the boom period has been reversed Also limited pent-up demand in investments in dwellings Following the end of the housing market boom, housing starts fell dramatically. The ratio of investment in dwellings to gross national disposable income is now 0.9pp below the centred long-term average. The ratio has been below the average since Q2 09 and the aggregate undershooting amounts to 9.4pp. Ahead of that the housing market boomed and there was an aggregate overshooting of the long-term average for investments in dwellings of 9.1pp. This indicates that the oversupply during the boom has been reversed and that investments in dwellings should soon start to catch up. Note: Deviation from the long term average calculated as a centred moving average over 15 years. When the overall housing market turns, the impact on growth will be positive but a significant amount of pent-up demand is not expected to be released as the boom period s oversupply is only slowly reduced. Additionally, we expect the contribution to growth to be rather limited. From 2005-07 the average contribution to growth from investment in 2 3 September 2013
dwellings was 0.2pp annually. Likewise, since 2011 the average drag on growth from the decline in investment in dwellings is around 0.1pp annually. Cross-country differences in investments in dwellings For investments in dwellings there are also large cross-country differences and the impact on growth varies considerably. In Spain, where the domestic housing bubble hit hard, the average drag on growth from investments in dwelling since 2008 was 1.1pp annually. The period of aggregate overshooting during the housing boom in Spain has almost been reversed, but the trend has not turned and due to a continued fall in house prices we do not expect investments in dwellings to have a positive contribution to growth within our forecast horizon. The Italian and French economies were also affected negatively by investments in dwellings and the drag since 2008 amounted to around 0.2pp annually. In Italy the underinvestments have only been limited and in France there have barely been underinvestments. Hence, we expect a continued period of low investments in dwellings in both countries. In Germany the period from 2004 until 2011 was characterised by investments in dwelling below the average and recent overinvestments have not yet reversed the undershooting. This suggests a period with a positive contribution to growth from investments in dwellings and a continuation of the period since 2008, where the impact on growth amounted to 0.1pp annually. Limited underinvestments in Italy Note: Deviation from the average since 2000. Room for investments to contribute to growth in Germany Note: Deviation from the average since 2000. 3 3 September 2013
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