The weakness of business investment in the advanced economies

The recovery under way in numerous developed economies following the Great Recession is proving to be weak and slow, held back partly by sluggish gross fixed capital formation. This is a worrying development, insofar as investment plays a crucial role in determining the accumulation of physical capital and, consequently, the possibility for future growth in an economy. Moreover, the weakness of investment in the most advanced economies is not a recent phenomenon, as shown by the decreasing share of this aggregate in gross domestic product over recent decades, even when the progressive reduction in the relative prices of capital goods associated with technological innovation is taken into account. This article analyses the behaviour of business investment in some of the main advanced economies for two purposes. First, it aims to identify the structural factors that may have been responsible for the tendency for investment to decline progressively as a proportion of GDP over the last three decades; and second, it seeks to determine the extent to which business investment during the Great Recession and the subsequent recovery has been in line with its usual determinants, or whether it is necessary to appeal to other factors to explain its behaviour. The structure of this article is as follows. The next section contains a descriptive analysis of gross fixed capital formation for a broad range of advanced economies, with particular emphasis on business investment, since this is the component that has the most direct impact on capital accumulation and on medium and long-term GDP growth. The third section considers those structural or longer-term elements which may help to explain the tendency for weakness that was already apparent prior to the crisis and that, therefore, has implications for the prospects for recovery of investment in the advanced economies. Of these elements, the following are worth highlighting: the shift in global production and investment towards emerging countries, the changes in the productive structure of the developed economies and the technological progress that drives investment in intangible assets. The fourth section presents the results obtained from estimating econometric models (an accelerator model, an error correction model and an autoregressive vector model) for business investment in the United States, the euro area and the United Kingdom, in order to analyse the impact of various real and financial factors on business investment in recent years, with particular emphasis on the recovery following the Great Recession. The fifth section concludes with a discussion of the possible relevance of these factors for the prospects for recovery of investment in the advanced economies.