Aqib Aslam, Samya Beidas-Strom, Daniel Leigh (lead

Private Investment: What’s the Holdup?
Aqib Aslam, Samya Beidas-Strom, Daniel Leigh (lead), Seok Gil Park, and Hui Tong. Support from Gavin Asdorian,
Joshua Bosshardt, Angela Espiritu, Hao Jiang, Yun Liu, and Hong Yang. Consultant: Sebnem Kalemli-Ozcan. 1
Central Questions
1. Is there a global slump in private investment?
2. Is the slump in private investment due to housing or is it broader?
3. How much of this slump reflects the weakness of economic activity?
4. Which businesses have cut back more on investment and why?
2
Q1. Is there a global slump in private investment? Mainly AEs.
Real Private Fixed Investment
(Log index; 1990 = 0)
Actual
2.5
1. World
Spring 2004 forecasts
2. Advanced Economies
2.5 2.5
3. EMDEs
Spring 2007 forecasts
4. EMDEs excl. China
2.5
2.0
2.0 2.0
2.0
1.5
1.5 1.5
1.5
1.0
1.0 1.0
1.0
0.5
0.5 0.5
0.5
0.0
0.0 0.0
0.0
1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014
1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014
3
Q2. AEs: Just housing or broader? Broader.
Categories of Real Fixed Investment
(Log index; 1990 = 0)
Actual
1.4
1. Residential
2. Business
1990–2004 linear trend
1.4 1.4
3. Business Structures
4. Business Equipment
1.4
1.2
1.2 1.2
1.2
1.0
1.0 1.0
1.0
0.8
0.8 0.8
0.8
0.6
0.6 0.6
0.6
0.4
0.4 0.4
0.4
0.2
0.2 0.2
0.2
0.0
0.0 0.0
0.0
-0.2
-0.2 -0.2
-0.2
1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014
1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014
4
Decomposing the slump: Not mainly housing.
Decomposition of the Investment Slump, 2008–14
(Average percent deviation from spring 2007 forecasts)
5
1. Residential vs. Business
2. Public vs. Private
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
Business
Public
-25
-25
Residential
Private
-30
-30
Total
Total
-35
-35
Advanced United
economies States
United
Kingdom
Japan
Selected Other euro
euro area
area
1/
Other
Advanced United
economies States
United
Kingdom
1/ Euro area economies (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
Japan
Selected
Other
euro area euro area
1/
Other
5
3. How much of the slump in business investment reflects output?
•
Has investment-output comovement been unusual?
(Comparison: Historical recessions.)
•
Causality: Is investment weak because the economy is weak?
(Instrumental variables. Fiscal consolidation.)
6
Has investment-output comovement been unusual?
Responses of Business I and Y to Various Shocks
Ratio of Responses
(Percent deviation from forecasts in the year of recession; years on x-axis)
(Average I to Average Y)
Historical recessions
5
1. Business Investment
GFC AEs
GFC crisis AEs
2. Output
5
0
GFC noncrisis AEs
3. Ratio of Responses
3.5
3.0
0
2.5
-5
-5
2.0
-10
-10
-15
-15
1.5
1.0
0.5
-20
-20
0.0
-25
-25
–1
0
1
2
3
4
5
6 –1
0
1
2
3
4
5
6
Historical
recessions
Note: Global financial crisis (GFC) and noncrisis advanced economies are as identified in Laeven and Valencia 2012.
GFC AEs
GFC crisis AEs
GFC noncrisis AEs
7
Causality: Is investment weak because the economy is weak?
Investment-Output Relationship: Instrumental Variables Estimation
Note: * p < .10; ** p < .05; *** p < .01.
8
Contribution of weak economic activity to weak in investment.
Real Business Investment: Actual and Predicted Based on Economic Activity
(Percent deviation of investment from spring 2007 forecasts)
Actual
10
1. Advanced Economies
Predicted
2. GFC Crisis AEs
10
0
3. GFC Noncrisis AE
10
0
0
-10
-10
-10
-20
-20
-20
-30
-30
-30
-40
-40
-40
-50
2007
2008
2009
2010
2011
2012
2013
2014 2007
2008
2009
2010
2011
2012
2013
Note: Global financial crisis (GFC) and noncrisis advanced economies are as identified in Laeven and Valencia 2012.
-50
2014
2007
2008
2009
2010
2011
2012
2013
-50
2014
9
Country level: Actual investment close to prediction.
Accelerator Model: Real Business Investment
(Log index)
Actual
6.5
1. United States
2. Japan
Spring 2007 forecasts
10.0
6.3
3. Germany
Predicted
4.6
4.5
4. France
4.8
4.6
9.8
6.1
4.4
4.4
5.9
9.6
4.3
4.2
5.7
4.2
9.4
5.5
4.1
4.0
5.3
9.2
4.0
3.8
1990 1994 1998 2002 2006 2010 2014: 1990 1994 1998 2002 2006 2010 2014:
1990 1994 1998 2002 2006 2010 2014: 1990 1994 1998 2002 2006 2010 2014:
Q3
Q3
Q3
Q3
10
Some euro area economies: Weaker-than-predicted investment.
Accelerator Model: Real Business Investment
(Log index)
Actual
4.0
1. Selected Euro Area
Economies1
3.9
Spring 2007 forecasts
2. Italy
Predicted
4.4
3. Spain
4.2
4.3
3.8
4
4.2
3.7
3.6
4.1
3.5
3.8
4
3.4
3.6
3.9
3.3
3.2
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
3.8
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
1/ Euro area countries (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
3.4
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
11
Role of financial constraints?
Accelerator Model: Real Business Investment
(Log index)
Actual
4.0
Spring 2007 forecasts
1. Selected Euro Area
Economies1
3.9
2. Italy
Predicted
Adding financial constraints
4.4
3. Spain
4.2
4.3
3.8
4
4.2
3.7
3.6
4.1
3.5
3.8
4
3.4
3.6
3.9
3.3
3.2
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
3.8
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
1/ Euro area countries (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
3.4
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
12
Role of policy uncertainty?
Accelerator Model: Real Business Investment
(Log index)
Actual
4.0
Spring 2007 forecasts
1. Selected Euro Area
Economies1
3.9
2. Italy
Predicted
Adding uncertainty
4.4
3. Spain
4.2
4.3
3.8
4
4.2
3.7
3.6
4.1
3.5
3.8
4
3.4
3.6
3.9
3.3
3.2
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
3.8
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
1/ Euro area countries (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
3.4
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
13
Firm surveys: What’s limiting production?
Insufficient Demand
100
(Percent)
2. Selected euro area economies1
1. Europe
100
3. United States
100
(Median)
80
80
60
60
60
40
40
40
20
20
20
0
0
0
2000
2004
2008
2012
2000
2004
2008
2012
2000
80
2004
2008
2012
Financial Constraints
100
4. Europe
(Percent)
5. Selected euro area economies1
100
6. United States
100
(Median)
80
80
60
60
60
40
40
40
20
20
20
0
0
0
2000
2004
2008
2012
2000
2004
2008
2012
2000
1/ Euro area countries (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
80
2004
2008
2012
14
Q4. Which businesses have cut back more on investment and why?
•
From macro … to micro (firm-level). Why?
•
Shed light on channels at work (beyond economy-wide developments).
•
Larger number of observations. Control for more factors.
•
Focus: Role of financial constraints and policy uncertainty.
15
Evidence: Financial constraints.
In countries with credit crunch, financially-dependent sectors cut I by more.
Note: *** p < .01.
16
Evidence: Policy uncertainty.
In countries with surge in uncertainty, more “sensitive” sectors cut I by more.
Note: * p < .10; ** p < .05; *** p < .01.
17
Illustration: Investment since the crisis for different types of firms.
Firm Investment Since the Crisis, by Firm Type
(Percent; based on local projection model)
10
1. Different Degrees of Financial Dependence
Less financially dependent
2. Different Degrees of Sensitivity to Policy Uncertainty
More financially dependent
Less sensitive to uncertainty
40
More sensitive to uncertainty
0
20
-10
0
-20
-30
-20
-40
-40
-50
-60
-60
-70
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
-80
2013
18
Conclusions
1. Slump in private investment: Mostly in AEs, broad-based. (Not just housing.)
2. Firms acting “normally” given weak activity, sales. Little unexplained weakness.
3. Some exceptions. (Financial constraints, uncertainties.)
4. To raise investment, need a comprehensive policy effort to expand activity.
19