Patterns of Investment
This post was written by Seamus Coffey
For the past four years domestic economy has been in freefall, which has resulted in nominal domestic demand falling from €172 billion in 2007 to €126 billion last year. This massive drop has been spread unevenly across the three components of domestic demand: consumption expenditure is down €11 billion; government expenditure on goods and services is down €2 billion while investment in fixed capital is down €30 billion.
The fall in the domestic economy has been led by the fall in investment, which in just four years has fallen 63% from €48 billion to €18 billion in nominal terms. The real decrease has been 52%. There is nothing in this snapshot that we don’t already know. The pattern of the four components of nominal GDP since are shown here.
Investment rose strongly up to 2006. It was largely unchanged in 2007 but the rapid fall since then is clearly shown. Table 15 in the National Income and Expenditure Accounts provides a breakdown of the investment by type.
In 2006, investment was €48.3 billion and €38.0 billion of that was accounted for by the construction and property sectors; dwellings (€22.6 billion), roads (€2.0 billion), other construction (€8.8 billion) and also costs associated with transfer of land and buildings (€4.5 billion) which makes up the bulk of the ‘other’ category in the above graph. By 2010 these four categories made up €10.7 billion of the €18 billion total.
The domestic economy has seen a nominal fall of around €46 billion – unsurprisingly 60% of this is due to the collapse of the construction and property sectors.
The Non-Financial Institution Sector Accounts gives an insight into the breakdown of investment by sector.
The household sector has gone from the largest source of investment as recently as 2008 to the smallest in 2010. If we use the figure for Consumption of Fixed Capital as provided in the Non-Financial Accounts we can get a measure that could be considered a form of Net Investment.
For the economy as a whole gross fixed capital investment exceeded consumption of fixed capital by less than €2 billion in 2010, with firms having an outturn of negative €2 billion.
We will get revised macroeconomic projections from the DoF as part of the forthcoming budgetary process. Their most recent projections are from April’s Stability Programme Update. Investment is expected to continue to decline in 2011 with a real drop of 11.5%, but minor growth is forecast for 2012. This growth is expected to quickly accelerate with real growth in investment of 4.5% projected for 2013 increasing to more than 5% for both 2014 and 2015.
There is little sign of this. The Q2 National Accounts show that real investment in the first half of 2011 was down 11% on the same period last year. This is in line with DoF projections but there is little to indicate that a turnaround in investment will occur in 2012. The collapse in household investment has eased but that was all that could occur as the overall drop now exceeds 80%.
The scope for further declines in investment is limited but absent both a willingness to borrow and a willingness to lend the scope for a return to 5% growth rates also appears limited.