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Business investment is picking up
Is the worst economic crisis of modern times really over? Though there are risks to the downside, the latest OECD Economic Outlook points to a recovery taking hold.
If growth staggered somewhat in the second half of 2010, it was partly because world trade slowed from exceptionally high growth rates earlier in the year, the upturn in the inventory cycle was easing and many governments began unwinding their fiscal stimulus packages, and in some cases, cutting spending to control burgeoning deficits. However, private investment looks likely to become more robust.
Projections show gross fixed investment growing by over 5% on average in 2011-2012, up from about 2.4% in 2010. In the US, business investment is likely to gradually accelerate over the next two years, to over 8% on average in 2012, nearly double the average rate of 2010. Private residential investment should also gain strength from 2.8% in 2011 to over 6% in 2012. Both Japan and the euro area should also post expansion in gross fixed investment in 2011-2012.
For now, OECD-wide business investment remains well below the average intensity of the previous three decades, despite the upturn in investment volumes since the start of the year. But this augurs well for a bounce-back in activity. There is ample scope for business investment to gain additional momentum as the recovery proceeds, the report says, especially in new equipment and software. Improvements in capital markets and in corporate profitability have already started to ease financing conditions for businesses in several economies, even though bank borrowing remains subdued, and corporate balance sheets–outside the financial sector–are in a healthy state. Capital goods shipments and orders have expanded in larger OECD economies, albeit softening somewhat since mid-year in the US. However, the report remains confident that healthier financial conditions will take over and lift investment levels over the projection period.
Recommended links and references
OECD (2010), OECD Economic Outlook 88, June 2010, see www.oecd.org/oecdEconomicOutlook, with a link to country summaries.
OECD Factblog (2010), “Business returns”: http://blog.oecdfactblog.org/?p=327
©OECD Yearbook 2011
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