Monday, 31 October 2016

Not the Way You Think

In World Economy News 31/10/2016

The euro area’s recovery isn’t suffering from a dearth of investment. Quite the contrary, in fact, and the current level of investment is unsustainable without more consumer spending.
This is the conclusion of a study published on Friday by European Central Bank economist Philip Vermeulen. It runs counter to the standard narrative of the region’s upswing: a consumption-driven recovery that relies on the weak euro and on central-bank stimulus, but is sorely lacking the investment needed to put the economy on a long-term path of expansion.
To address the perceived lack of capital spending in the region, the European Commission in 2014 set up the so-called “Juncker Plan.” In Germany alone the investment gap may be around 4 percent of output, or 120 billion euros ($131 billion), according to Marcel Fratzscher, head of the Berlin-based German Institute of Economic Research.
To be fair, a comparison of the post-crisis performance of the U.S. and of the euro area shows that the latter has been lagging behind on investment, says Vermeulen.
But compared to how investment recovered after previous recessions, the current recovery is stronger on investment than on consumption: consumer spending is up only 4.1 percent from the trough in the first quarter of 2013, while capital spending is 7.7 percent higher.
“This finding is important for policymakers,” says Vermeulen. “The current recovery in investment can only be sustained if aggregate consumption also grows at a sufficiently robust pace in parallel. Policymakers would be misguided to focus on investment exclusively.”

“Instead, policies should aim for a broader recovery of aggregate demand and consumption in particular,” he writes. “The ECB’s current accommodative policy stance is therefore warranted, as it provides support for sustained growth in aggregate demand.”

Source: Bloomberg