Compared to previous years, the outlook for the Eurozone economy looks promising both for this year and next. A key element for the recovery to last is the behaviour of corporate capital expenditures. Eventually, they should increase faster than GDP as growth picks up. This is called the accelerator effect.

The following chart compares for a number of countries the cumulative real GDP growth since the end of 2008 and the cumulative real growth rate of corporate investments in machinery and equipment.

Corporate investments

Several comments can be made :

  1. As expected there is a positive relationship (admittedly the number of observations is low)
  2. The numbers for Greece show how deep the recession has been
  3. Most Eurozone countries have seen a cumulative decline in capital expenditures, which implies that the recent improvement has not yet compensated for the decline in corporate investments during the two recessions since 2008
  4. Even Eurozone countries with a cumulative increase in GDP still witness a cumulative decline in investments. Germany is the most striking example in this respect
  5. In the UK, the US and Ireland we see an accelerator at work: the increase in capital expenditures is bigger than the increase in GDP.

Possible interpretations for the behaviour of corporate investments in the Eurozone are that uncertainty has been weighing on the willingness to invest and that the recovery is still of too recent a nature to justify a significant increase in capital expenditures, the output gap still being too negative. If the experience of the US and the UK is to provide any guidance, the continuing recovery should eventually boost investment activity.