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Investment led Growth: Expectations vsReality
August 2016Ilias Lekkos [email protected] Irini Staggel [email protected] Aggelopoulou [email protected]
Economic Research & Investment Strategy
2
Growth & Investments: Expectations vs Reality
3
In this respect we have seen a number of studies advocating that investment led growth is imminent, based on the
simplified argument that – when compared to the recent past – the level of investments in the Greek economy
seems quite depressed.
After the successful completion of the 1st review of the 3rd Economic Adjustment Programme, the discourse around
the Greek economy turned - quite belatedly in our opinion – into how the Greek economy can escape the
recessionary regime that it has been stuck in for the past 8 years and achieve the much coveted transition to an
export-oriented and investment-based economic growth model.
Our view is that – although we have great belief in mean reversion- investments do not materialize out of thin air.
Instead they are made for a reason and when condition are favourable.
Hence the aim of our study is twofold: first we intend to investigate the factors that drive the most dynamic and
productive part of gross fixed capital formation, namely the “private non-residential” investments in the short and
medium –term. Secondly looking to the long-term we attempt to estimate the equilibrium level of investment
activity that is in line with the new long-term potential GDP growth of the Greek Economy.
In the first stage, we focus on non-residential private investments and attempt to identify the factors that
determine the level of investment activity in the short term and to quantify the relationship between investments
and these factors. The main conclusion we draw is that, if we aim to achieve a 10% increase in non-residential
private sector investments (i.e. €1.2bn., approximately the 1997-2008 average), the following are required:
4
An increase in net lending of €7.7bn.
An increase in excess demand (consumption & exports) of €8.1bn.
A reduction in the real interest rate of 1.8%.
An increase in Public Investment Program PIP) spending of €2.0bn.
An improvement in the business climate stability index of 4.3 points.
1st Stage: Factors driving investments in the short-run
The second stage of this study complements the first, and focuses on estimating the share of investments to GDP
(I/Y) that should be reached over time in order for the investment rate to be in equilibrium and consistent with the
long-term growth potential of the Greek economy. Assuming that the long-term growth rate of Greek GDP is 2.2%,
then:
5
In 2020, we estimate that the ratio Ι/Υ will increase to 23.4% from 11.6% in 2015, but it will remain lower than
the historic high level of 24.6% achieved in 2007.
We expect €201bn investments for the 2016-2020 period or €40bn per year, up from €30bn - per year
recorded - during 2009-2015.
Despite our forecast for a substantial increase in investments over the next five years, we anticipate the
divestment process to continue until 2020, as depreciation continues to dominate new investments. This will
result in a decline in the value of the accumulated net capital stock down to €760bn by 2020.
Going forward to the 2021-2030 period, an increase of €185bn in the net capital stock will be the result of
€528bn of new investments (€53bn per year) minus €343bn of depreciation.
2nd Stage: Estimating an equilibrium level of investment rate
6
Private Non-Residential Investments: Determining Factors
Determination of the Investments Equilibrium Level to GDP
Investments: Evolution and Composition
Evolution of Investments
Source: AMECO, ELSTAT, Piraeus Bank Research
The 1995-2004 period was characterized by breakneck growth in investment activity, fuelled by the prospects of
Greek membership of the EMU, reduced borrowing costs, credit expansion and, finally, the prospects of hosting the
2004 Olympic Games.
7
2007 was the year of peak investment activity, when gross fixed capital formation reached €61.6bn or 24.6% of GDP.
From 2008 onwards, investment activity collapsed , and in 2015 it was limited to just €21.4bn. As a result, the share
of investments to GDP has fallen by more than 50%.
Gross Fixed Capital Formation(constant prices 2010, €.bn)
Investments as a share of GDP (constant prices 2010)
0
5
10
15
20
25
30
35
40
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
average I/Y = 22%2007: 24.6%
2015: 11.6%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
2007: €61.6 bn
2015: €21.4 bn
Source: ELSTAT, Bank of Greece, AMECO, Piraeus Bank Research
Strong capital accumulation throughout the 1995-2007 period, in conjunction with the significant economic
contraction that followed, resulted in a fall in capital productivity, as the existing stock of equipment was used to
produce a progressively lower level of goods and services.
Capital productivity(GDP as % of net capital stock,
constant 2010 prices)
Marginal efficiency of capital & Real interest rates on business (%)
At the same time, the additional (marginal) revenue from new investments declined to negative levels, resulting in a
negative spread between real interest rates and marginal revenue.
8
Return on Capital
20.0
22.0
24.0
26.0
28.0
30.0
32.0
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
-70.0
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Interest Rate (r) Marginal efficiency of capital (mec)
Source: ELSTAT, AMECO, Piraeus Bank Research
The three main investment categories are: households’ residential investments, businesses’ equipment investments
and the general government’s other construction investments.
Decomposition of Gross Fixed Capital Formation (current prices € mn.)
Gross Fixed Capital Formation,Residential (current prices)
The category that showed the strongest downward trend was housing with its share declining to 6.6% of total
investments in 2015 from 40% in 1995.
9
Gross Fixed Capital Formation Composition
0
10000
20000
30000
40000
50000
60000
70000
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Others Residential Other Construction Machinery, transportequip, weapon systems
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
YoY % change % of total
2008 -2015:-93%
Source: ELSTAT, AMECO, Piraeus Bank Research
The evolution of Net Capital Stock (K) is a function of new Investments (I) and the level of depreciation (δ) of the
capital stock:
Capital Stock, Investment flow & Consumption of fixed capital (constant prices 2010 € bn.)
10
Capital Stock, New Investments & Depreciation
tttt KIKK 1
From 2011 onwards, the decline in investment activity and the increased depreciation rate led inevitably to a
reduction in the accumulated stock of capital in the Greek economy.
0
100
200
300
400
500
600
700
800
900
1000
-60
-40
-20
0
20
40
60
80
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
Gross Fixed Capital Formation,LHS
Fixed Capital Consumption (reverse sign), LHS
Net Capital Stock, RHS
11
Private Non-Residential Investments: Determining Factors
Determination of the Investments Equilibrium Level to GDP
Investments: Evolution and Composition
Private Non-Residential Investments: The main framework
In order to be in a position to understand the main causes of the present decline in investment activity but also to
be able to develop the most appropriate strategies and policy initiatives to reverse the current divestment trend, it
is imperative to:
1) Identify the factors that determine businesses’ decisions to make new investments.
2) Quantify the relationship between these factors and subsequent investment decisions.
3) Prioritize and evaluate the necessary actions that can be taken in order to boost investments in the
short-to-medium term.
12
Private Non-Residential Investments: Definition
We define Private Non-Residential Investments as:
Private Non-Residential Investment = Gross Fixed Capital Formation
(Minus) General Government Investments
(Minus) Investments in Housing
13
We choose to exclude General Government’s investment activity because we aim to evaluate whether and to what
extent public investment activity stimulates(crowds-in) or inhibits(crowds-out) private sector investment.
We also exclude residential housing investment as we choose to focus on the so-called “productive” investment,
that is investment activity that contributes to the improvement in the long-term potential output of the Greek
economy.
Private Non-Residential Investments: Evolution
Source: ELSTAT, Piraeus Bank Research
Private Non-Residential Investments exhibited a continuous upward trend from 1995 to 2003, following the general
upward trend of gross fixed capital formation in the country, amounting to, on average, 42% of the total investments
in the Greek Economy.
Following a temporary decline in the post-Olympic period, Private Non-Residential Investments reached a record
high in 2007-2008, before falling sharply thereafter. However, despite the decline, the Private Non-Residential
Investments’ share to the Total Investments increased to 60% as public, and to an even greater extent, residential
investments recorded an even steeper decline.
14
Private Non - Residential Investments (current prices)
(€ mn.) & (% of total) Annual % change
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Non -Residential Private Investm. Gross Fixed Capital format.
0
10
20
30
40
50
60
70
0
5000
10000
15000
20000
25000
30000
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
mn. €, LHS % of total, RHS
i. According to our econometric model, the evolution of Non-Residential Private Investment (GFCF_EXCLHGG)
depends on:
ii. The net flow of bank lending, i.e. the change in the outstanding amount of loans, which reflects the balance
between loan repayment and new business lending (BL_FLOWS).
iii. The level of excess demand, i.e. the deviation of total demand for consumption (private and public) and
exports from their long-term trend (EXCESS_DEMND).
iv. The borrowing costs, as defined by the real interest rate on lending of non-monetary financial institutions and
sole proprietors, that is the nominal interest rate minus inflation (IR_R_BUS).
v. The expenditures of the public investment program (PIP), which defines the level of the public sector’s
investment activity.
vi. The level of business uncertainty as reflected by our Business Climate Stability Index, (BCSI).
15
The 5 factors that drive investments
1st Factor: Credit flows to the private sector
Source: Bank of Greece, Piraeus Bank Research
The negative net flow of credit to the Greek economy is a result of both the need for private sector deleveraging
(lack of demand for new credit) and also of the constrained financing capability of the banking system (restricted
supply).
Credit to private sector(outstanding amount at end of period, € mn.)
Net Flow of Credit to non-financial corporations & sole proprietors (€ mn.)
16
-4,000
-2,000
0
2,000
4,000
6,000
8,000
Q1
'99
Q4
'99
Q3
'00
Q2
'01
Q1
'02
Q4
'02
Q3
'03
Q2
'04
Q1
'05
Q4
'05
Q3
'06
Q2
'07
Q1
'08
Q4
'08
Q3
'09
Q2
'10
Q1
'11
Q4
'11
Q3
'12
Q2
'13
Q1
'14
Q4
'14
Q3
'15
0
50,000
100,000
150,000
200,000
250,000
300,000
Q1
'99
Q4
'99
Q3
'00
Q2
'01
Q1
'02
Q4
'02
Q3
'03
Q2
'04
Q1
'05
Q4
'05
Q3
'06
Q2
'07
Q1
'08
Q4
'08
Q3
'09
Q2
'10
Q1
'11
Q4
'11
Q3
'12
Q2
'13
Q1
'14
Q4
'14
Q3
'15
Credit to non-financial corp. & sole proprietors Credit to private sector
2nd factor: Demand for Goods and Services
Source: ELSTAT, Piraeus Bank Research
One of the most important reasons that companies proceed with new investments is to meet increasing domestic
and external demand for the products and services they produce.
17
Total Demand ( € mn.)
Excess demand (HP- filter, cyclical component, € mn.)
We estimate the total demand factor in two steps: first we define total aggregate demand as the sum of domestic
consumption (both private and public) and exports. We then estimate excess demand as the deviation of total
aggregate demand from its long-term trend. That estimate provides us with a measure of unforeseen demand that
Greek firms will have to respond to.
0
50,000
100,000
150,000
200,000
250,000
300,000
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Exports Consumption Total Demand
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
Q1
'95
Q1
'96
Q1
'97
Q1
'98
Q1
'99
Q1
'00
Q1
'01
Q1
'02
Q1
'03
Q1
'04
Q1
'05
Q1
'06
Q1
'07
Q1
'08
Q1
'09
Q1
'10
Q1
'11
Q1
'12
Q1
'13
Q1
'14
Q1
'15
Cyclical component (Excess demand)
3rd Factor: Real & Nominal Borrowing costs
Business loans interest rate (%)Gross operating surplus (annual% change)
& Inflation (CPI)
18
Despite the marginal decline in nominal interest rates, the strengthening of deflationary pressures have pushed real
interest rates to very high levels.
Inflation can be a determining factor for investment activity as it is an indication of the equilibrium relationship
between supply and demand, affects businesses’ profit margins, and also contributes significantly to the formation
of real interest rates.
Source: Bank of Greece, ELSTAT, Piraeus Bank Research
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Q1
'99
Q4
'99
Q3
'00
Q2
'01
Q1
'02
Q4
'02
Q3
'03
Q2
'04
Q1
'05
Q4
'05
Q3
'06
Q2
'07
Q1
'08
Q4
'08
Q3
'09
Q2
'10
Q1
'11
Q4
'11
Q3
'12
Q2
'13
Q1
'14
Q4
'14
Q3
'15
Real Interest Rate Nominal Interest Rate
-15
-10
-5
0
5
10
15
20
25
30
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Q1
'99
Q4
'99
Q3
'00
Q2
'01
Q1
'02
Q4
'02
Q3
'03
Q2
'04
Q1
'05
Q4
'05
Q3
'06
Q2
'07
Q1
'08
Q4
'08
Q3
'09
Q2
'10
Q1
'11
Q4
'11
Q3
'12
Q2
'13
Q1
'14
Q4
'14
Q3
'15
Inflation, LHS Gross operating surplus, RHS
4th factor: Public Investment Program
19
Public Investments Program, (expenditures, 4Q Moving Sum)
0
2000
4000
6000
8000
10000
12000
14000
Q1/
99
Q4/
99
Q3/
00
Q2/
01
Q1/
02
Q4/
02
Q3/
03
Q2/
04
Q1/
05
Q4/
05
Q3/
06
Q2/
07
Q1/
08
Q4/
08
Q3/
09
Q2/
10
Q1/
11
Q4/
11
Q3/
12
Q2/
13
Q1/
14
Q4/
14
Q3/
15
Source: MinFin, Piraeus Bank Research
The Public Investment Program (PIP) is the main mechanism through which EU structural funds are channelled into
the Greek Economy. As such the PIP expenditure constitutes the majority of public spending on infrastructure
projects. Therefore the inclusion of this variable into our model allows us to quantify the multiplier effect of public
sector investment, that is to what extent PIP spending mobilises (crowds-in) additional private sector investment.
From an econometric standpoint, the use of PIP as an explanatory variable is possible, because we exclude General
Government investments from the dependent variable, i.e. Private Non-Residential Investments.
5th Factor: Business Climate Stability Index (BCSI)
20
A stable and predictable business environment is undoubtedly a very important factor in the investment decision
process. In order to quantify the level of economic uncertainty, we have created a new stability index of Business
Climate calculated in two stages:
• We calculate the gap between the estimated trend of main economic indicators (such as industry, construction,
retail trade and services) and the respective expectations 3 months ago (according to the European
Commission's Business and Consumer Surveys data for Industry, Constructions, Retail Trade and Services).
• We estimate (on a rolling basis) the volatility (in terms of standard deviation) of the gap between the estimated
trend and the expectations three months ago.
• By construction, higher values of the BCSI index signify increased levels of economic uncertainty and limited
ability of business participants to accurately forecast developments in the near future.
5th Factor: BCSI Methodology
21
We define as main variables:
• Industry:
Production trend observed in the current quarter (Eb)
Production expectations for the next quarter (Fb)
• Construction:
Building activity development over the past 3 months (Ek)
Level of current overall order books (Fk)
• Retail Trade:
Business activity (sales) development the past 3 months (EL)
Business activity in the next 3 months (FL)
• Services:
Evolution of demand over the past 3 months (EY)
Expectation of demand over the next 3 months (FY)
YLkbi
mamai titi
FEWY
,,,
)()()( 3
ma: 3 month moving average
Wi: weight
5th Factor: BCSI Index
Business Climate Stability Index (BCSI)
Looking over recent history from the beginning of the sample period in 2000 up until end-2015, we see that
increased levels of our business uncertainty index appear to coincide with periods of limited visibility and
divergence between initial expectations and actual realized levels of economic activity. The most typical examples
are the peaks in 2009, mid 2013 as well as the second half of 2015.
22Source: European Commission – DG ECFIN, Piraeus Bank Research
0.0
2.0
4.0
6.0
8.0
10.0
12.0Ja
n-0
0
No
v-0
0
Sep
-01
Jul-
02
May
-03
Mar
-04
Jan
-05
No
v-0
5
Sep
-06
Jul-
07
May
-08
Mar
-09
Jan
-10
No
v-1
0
Sep
-11
Jul-
12
May
-13
Mar
-14
Jan
-15
No
v-1
5
Average 1999-2015 BCSI
Econometric Specification of the Investments Model
23
The econometric model we use, estimates the correlation between Private Non-Residential Investments in each
quarter and the corresponding bank financing and real interest rates, the excess demand in the previous quarter, the
PIP expenditures with a six-month lag and the business climate stability index with a _1.5year lag.
Optimal Specification of the Private Non-Residential Investments Model
ttttttt BCSIPIPBUSRIRDEMNDEXCESSFLOWSBLexcHGGGFCF 65243121 _____
All variables enter our model in standardised form. In this way we address the issue of non-comparability of the
beta coefficients of explanatory variables measured in different units of measurement and with large differences in
their means and standard deviations.
Econometric Results I: Model fit
24
Despite the fact that investments are one of the most volatile components of GDP and without using any
autoregressive term, our model does a pretty good job of capturing the dynamics of Private Non-Residential
Investments over most of the 2000-2015 period. The only exception is the post – Olympic Games period between
Q3-2004 and Q3-2006, something that we attribute to "investment fatigue" in the run-up to the Athens Olympic
Games .
Non - Residential Private Investments
Source: ELSTAT, Bank of Greece, MinFin, AMECO, DG-ECFIΝ, Piraeus Bank Research
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-2
-1
0
1
2
3
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Residual Actual Fitted
25
Coefficient (beta) t – Statistic
BL_FLOWS 0.339 4.208*
EXCESS_DEMND (-1) 0.237 3.502*
IR_R_BUS -0.509 -5.360*
PIP (-2) 0.232 3.156*
BCSI (-6) -0.148 -2.205*
Adjusted R - squared 76.6%
*Statistical significant at 5% level, p-value<0.05
Source: ELSTAT, Bank of Greece, MinFin, AMECO, DG-ECFIΝ, Piraeus Bank Research
All variables are statistically significant (at 5% confidence level) and have the expected sign, i.e. we estimate a
positive relationship between private sector investment and business lending, demand and public investments and
a negative relationship with respect to interest rates and economic uncertainty_(i.e. public sector investment
crowds-in additional private sector investments)
Econometric Results II: Regression Coefficients
Interpretation of results: What’s necessary for a 10% increase in
Private sector’s investments
26
To facilitate the better understanding of our findings we translate the estimated coefficients to reflect the changes
necessary to achieve a hypothetical increase in Private Non-Residential Investments of €1.2bn., which for 2016
would mean an increase of 10%, approximately the 1997- 2008 period average. Based on our model a 10% increase
in private non-residential investments requires:
An increase in net flow of loans of €7.7bn.
An increase in excess demand (consumption & exports) of €8.1bn.
A reduction in the real interest rates of 1.8%.
An increase in Public Investment Program (PIP) expenditures of €2.0 bn.
An improvement in the business climate stability index of 4.3 points.
Increase in Non - Residential Private Investments by €1.2bn…
27
Loans Net Flow: Recovery to positive net flow
Excess Demand: Consumption and Exports Recovery
Real Interest Rate: interest rates decline
PIP: Expentitures close to the 2010 levels BSCI: Historic low levels of the index
…requires a change of:
Source: ELSTAT, Bank of Greece, MinFin, AMECO, DG-ECFIΝ, Piraeus Bank Research
€ 7.7 bn € 8.1 bn
-1.8 %-4.3 pts
€ 2.0 bn
BCSIPIPReal Interest
RateExcess
DemandLoans
Net Flow
6.6
-10
-5
0
5
10
15
20
25
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
bn
€
Scenario 10%
10.4
-10
-5
0
5
10
15
20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
bn. €
Scenario 10%
5.1
0
1
2
3
4
5
6
7
8
9
10
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
%
Scenario 10%
0.9
0
1
2
3
4
5
6
7
8
92
000
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
po
ints
Scenario 10%
8.4
0
2
4
6
8
10
12
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
bn
. €
Scenario 10%
Interpretation of results: Relative Factor Ranking
28
A more systematic way of ranking the explanatory factors according to the size of their relative impact on
investments is to examine the ratio of the beta coefficient of each factor to the beta coefficient of all other factors.
A ratio greater (smaller) than one signifies that a shock to the factor in the numerator (denominator) has a greater
impact on investments than a equal shock to the denominator (numerator).
Based on the above matrix, real interest rate plays the most important role in the determination of new private
investment, followed by bank lending flows, excess demand, PIP and finally the business climate index.
Source: ELSTAT, Bank of Greece, MinFin, AMECO, DG-ECFIΝ, Piraeus Bank Research
A
B BL_FLOWS EXCESS_DEMND (-1) IR_N_BUS INFL PIP (-2) BCSI (-6)
BL_FLOWS 1.0 0.8 1.1 1.5 0.9 0.6
EXCESS_DEMND (-1) 1.2 1.0 1.3 1.8 1.1 0.7
IR_N_BUS 0.9 0.7 1.0 1.4 0.8 0.5
INFL 0.7 0.5 0.7 1.0 0.6 0.4
PIP (-2) 1.1 0.9 1.2 1.6 1.0 0.7
BCSI (-6) 1.7 1.4 1.8 2.5 1.5 1.0
Coefficient Beta "A" / Coefficient Beta "B"
29
Investments: Evolution and Composition
Private Non-Residential Investments: Determining Factors
Determination of the Investments Equilibrium Level to GDP
Determination of the long-term (equilibrium) investment to GDP ratio
30
Starting from the main difference equation K(t) – K(t-1) = I(t) – dK(t), we can easily prove that investments as a
percent of GDP (I/Y) in a long-term equilibrium (steady state) can be expressed as the ratio between the economic
growth rate (g), depreciation rate (δ) and capital to GDP ratio (K/Y):
Y
Kg
Y
I
Where:
Investments (I): Gross fixed capital formation at constant prices 2010
GDP (Y): real gross domestic product
Growth Rate (g): potential GDP growth rate
Capital stock (K): net capital stock at constant prices 2010
Depreciation (d): depreciation rate of net capital stock to the fixed capital consumption at constant prices 2010
Fenz et. al. (2015), Causes of declining investment activity in Austria. ONB, Quarterly review of economic policy Q3/15 Gros, D. (2014) Investment as the key to recovery in the euro area. CEPS Policy Brief No 326
Long Term Ratio I/Y: Determining Factors
Source: AMECO, Piraeus Bank Research 31
However from these three factors (growth, depreciation and capital stock) which define the equilibrium I/Y ratio,
two i.e. the depreciation rate and the stock of capital equipment are (each for different reasons) of limited interest.
More specifically:
i. The long-term depreciation rate determines the degree of physical and technological devaluation of capital
equipment based on national accounting standards. Based on the period 2000-2015 average, we estimate that
the long-term depreciation level is δ = 3.95%.
ii. The value of outstanding productive capital stock _ defined as the accumulated annual investment flow_
(unlike the flows that is one of the most volatile GDP components) does not present any remarkable volatility.
The average ratio is K / Y = 3.8 , i.e. the value of the outstanding production equipment amounts to 3.8 times
the annual GDP.
Depreciation rate (δ) Capital stock (Κ/Υ)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Depreciation Rate
Steady state δ = 3.95
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Capital Ratio (K/Y)
Steady state Κ/Υ = 3.80
Ratio I/Y and Potential Growth Rate
Source: AMECO, Piraeus Bank Research 32
On the contrary, the impact of the long-term GDP growth rate (g), i.e. the potential growth rate, on the long-term
equilibrium I/Y ratio is crucial. If the economy – making an extreme assumption - is in long-term stagnation, i.e. g=0
(with Κ/Υ=3.8 and δ=3.95%), then the long-term investment level will stabilize at 15% of GDP. If instead we assume a
potential GDP rate of 3%, then the investment rate will reach 26.4% of GDP.
Steady state investment rate (I/Y) vs growth rate Evolution of investment rate and forecasts based on steady state
Assuming that the Greek economy can achieve a potential growth rate of 2.2% from 2020 onwards, then
investments should stabilize at 23.4% of GDP from 11.6% at end-2015.
3.65.5
7.49.3
11.213.1
15.016.9
18.820.7
22.624.5
26.428.3
30.2
0
5
10
15
20
25
30
35
-3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Ste
ady
stat
e I/
Y
Steady state economic growth rate
14.3
22.7 21.4 22.7 23.4 23.4
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
19
61
-19
89
19
90
-19
99
20
00
-20
08
20
09
-20
15
20
16
20
17
20
18
20
19
20
20
20
21
Investement share of GDP (I/Y), LHS
Steady state ποσοστό επενδύσεων, LHS
Real GDP growth rate, RHS
Up to 2020 and beyond……
33
Although our analysis is based on a simplified and parsimonious model, it allows us to draw a number of significant
conclusions:
2009-2015 was a period of net divestment, i.e. a period of net decrease in the stock of productive capital in
the Greek economy. This was the result of €209bn of new investment versus a deprecation of €252bn. As a
result the capital stock in 2015 declined to €815bn compared to the 2010 historic high of €871bn.
In 2020, we estimate that the ratio Ι/Υ will increase to 23.4% from 11.6% in 2015, but it will remain below its
historic high level of 24.6% achieved in 2007.
We expect €201bn of new investments for the 2016-2020 period or €40bn per year, up from €30bn per year
recorded between 2009-2015.
Despite our forecast of an investment pick-up over the next five years, we anticipate the divestment process to
continue, as the level of depreciation will continue to outweigh new investments. As a result the value of the
accumulated capital stock will fall to €760bn in 2020.
Going forward, in the 2021-2030 period, we forecast a net capital increase of €185bn as a result of €528bn of
investments (€53bn per year) and €343bn worth of depreciation.
To 2020 and beyond…
34
Investments & Net Capital Stock (€ bn.)
Source: AMECO, Piraeus Bank Research
815 760
945
297
442209
201
528
177
261252
257
343
556
1989
Investment Fixed Capital Consumption Net Capital Stock
1990-1999 2000-2008 2009-2015 2016-2020 2021-2030
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