MAGYAR NEMZETI BANK
2 Why is investment low in Europe? Investment plays a special role in the functioning of an economy, as it influences economic growth not only in the short but in the long run as well (OECD 2015). As an element of expenditures, in the short run it adds to demand, whereas later the capital created as a result of the investment leads to an increase in potential output. Therefore, a lower investment level due to a possible crisis may hinder economic growth permanently as well. This impact may be amplified by the two-way causal relationship which can be discovered between investment and economic growth. This stems from the fact that enterprises make their investment decisions mainly on the basis of their profit expectations for the future, thus a lower long-term growth potential results in lower propensity to invest (ECB 2014a). As a result, the fall in investment may be coupled with persistently low economic growth, and may necessitate economic policy intervention. Investment activity in the euro area has steadily declined since the outset of the crisis, compared to both the precrisis level and GDP. Examining the underlying reasons is important not only because the lower investment level affects our region (the V4 countries) as well, but also because euro-area growth also significantly affects the growth of Hungary through the tight commercial relations. Even though this chapter focuses on the euro area, the reasons presented are valid – to a certain extent – for Hungary as well, which is not analysed in detail. The reasons for the moderate investment level can be divided into two groups. One of these is constituted by the cyclical reasons related directly to the crisis. Of these reasons, the literature emphasises low demand, the real estate bubble that evolved before the crisis, high indebtedness, increasingly tight lending conditions since the crisis and the persistently elevated uncertainty. Although basically these are of a temporary nature and are easing as the crisis is coming to an end, as a result of the slow recovery, they continue to affect the developments in the investment level. The permanently low level of the EU investment rate is a result of long-term structural factors as well, in addition to reasons that prevail in the short run. In addition to cyclical factors, the problem of unemployment of the young generation, the phenomenon of labour market hysteresis, product market rigidities, lack of investment in infrastructure, the deceleration in FDI and the short-term approach of the financial market also have an adverse effect on the investment rate. Permanent changes appearing in the economic structure also result in a lower level of the investment rate. Firstly, this follows from the increasing weight of the tertiary (services) sector and thus from its lower investment and capital intensity compared to that of the industrial sector. Secondly, it is also attributable to the limits of statistical measurement possibilities. Namely, only a part of the knowledge-based investment appears in intangible investment, and real verification of the depreciation of investment is also difficult. In parallel, the spread of digital technology is increasingly intensive in production processes. The intention with the concept of Industry 4.0 is to facilitate this. Based on an expert forecast, the successful introduction of the Industry 4.0 in Europe requires a 35 per cent increase in investment activity in the next 10–20 years. In connection with the implementation of the concept, special attention must be paid to prevent the further increase of the productivity differences between large enterprises and the SME sector. Increasing the investment rate may primarily be achieved through efficient structural and regulatory solutions. One solution can be to increase product market competition as well as to reduce entry and functioning constraints. In addition, a tax system focusing on investment-related tax allowances as well as the increasing of the expenditures on public investment and a policy that facilitates direct investment inflows would also contribute to a rise in the investment rate. Finally, the reduction of financial fragmentation, a further reduction of non-performing loans as well as the strengthening and diversification of the corporate sector’s raising of financial funds may also be parts of the solutions. 28
GROWTH REPORT • 2016
