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A Structural Interpretation of the Recent Weakness in Business Investment

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  • Russell Barnett
  • Rhys R. Mendes

Abstract

Since 2012, business investment growth has slowed considerably in advanced economies, averaging a little less than 2 per cent versus the 4 per cent growth rates experienced in the period leading up to crisis. Several recent studies have attributed a large part of the weakness in business investment to cyclical factors, including soft aggregate demand, and, to a lesser degree, heightened uncertainty and tighter financial conditions. In contrast, our analysis suggests that structural factors could provide an alternative explanation for the observed weakness in Canadian business investment. As a result, there is a risk that this weakness could prove to be much more persistent than cyclical interpretations suggest. Overall, population aging combined with two factors that could prove to be structural—weak productivity growth and the 2014–15 collapse in oil prices—could plausibly reduce the investment-to-output ratio by as much as 2 percentage points by 2020 relative to the average of 12 per cent observed since 2000, or an additional 0.9 percentage points relative to its 2016 value. This would have important implications for the economic outlook.

Suggested Citation

  • Russell Barnett & Rhys R. Mendes, 2017. "A Structural Interpretation of the Recent Weakness in Business Investment," Staff Analytical Notes 17-7, Bank of Canada.
    • Handle: RePEc:bca:bocsan:17-7
    DOI: 10.34989/san-2017-7
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    References listed on IDEAS

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    2. Andrew Agopsowicz & Bassirou Gueye & Natalia Kyui & Youngmin Park & Mohanad Salameh & Ben Tomlin, 2017. "April 2017 Annual Reassessment of Potential Output Growth in Canada," Staff Analytical Notes 17-5, Bank of Canada.
    3. Maxime Leboeuf & Robert Fay, 2016. "What Is Behind the Weakness in Global Investment?," Discussion Papers 16-5, Bank of Canada.
    4. Olivier Gervais & Marc-André Gosselin, 2014. "Analyzing and Forecasting the Canadian Economy through the LENS Model," Technical Reports 102, Bank of Canada.
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    Cited by:

    1. Jing Yang & Ben Tomlin & Olivier Gervais, 2017. "Alternative Scenario to the October 2017 MPR Base-Case Projection: Higher Potential Growth," Staff Analytical Notes 17-18, Bank of Canada.

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    More about this item

    Keywords

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    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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