Investment: A Worldwide Boom

Investment is booming: not only in the UK but also in the US, Japan and in Europe. In this Briefing Paper we seek to understand why this is happening – a global phenomenon clearly requires a global not a local explanation – and to consider whether the boom will continue. To this end (and not in order to discriminate between alternative theories of investment), we examine the main theories of investment and show that recent developments are consistent with models based on the accelerator, or which emphasize the cost of finance or which depend upon stock market valuation effects. And, no matter which theory holds, the implication is the same: investment will weaken in 1989 and this is an important element in our forecast of slower world and UK growth next year.
But there is an alternative view, which implies a more optimistic outlook. The theories which we consider are essentially cyclical: they focus on the key role of (volatile) investment spending in the business cycle. It may well be that the present surge in investment is a long-tern, structural phenomenon reflecting either a shift in the pattern of world demand or the spread of computer-based technology, which has raised the efficiency of investment. In this case, and notwithstanding this year's surge in investment, tighter monetary policy and the stock market crash, the present boom in investment may have a lot further to run.     

Deciphering the UK's business investment performance

• ? Absent June 2016's Brexit vote, growth in business investment would have been much faster and the UK would be sharing in a global “investment boom”. Or so the Bank of England claims. But the reality is more complicated. What is striking is just how subdued investment growth has been across countries.
• ? Survey evidence presented by the Bank suggests that recent business investment growth has been less than a third of what might have been achieved absent Brexit. The UK has also been highlighted as an investment laggard among major economies.
• ? Headline investment growth has certainly been relatively weak since 2016. Uncertainty around future UK‐EU trading arrangements may have resulted in some investment being deferred or cancelled. And the Brexit‐related fall in sterling will have pushed up the cost of imported capital equipment, cutting demand.
• ? But a collapse in investment in the North Sea sector has had a significant effect on headline investment growth. On an excluding‐extraction basis, UK business investment rose at the same pace as the US (ex‐extraction) and faster than Japan in 2016 and 2017, while average annual growth rises from 1.0% to 2.4%.
• ? What is striking about the recent performance of business investment in the UK and other G7 members is how subdued growth has been across economies. Despite a favourable environment, no major advanced economy has seen investment rise at the type of rates that the Bank predicts the UK, but for Brexit, should be now enjoying.
• ? Sectoral shifts, the rise of intangible investment and the consequences of technooptimism offer some reasons as to why measured investment may have become less sensitive to economic upswings. These same factors suggest that 1990s‐style growth in private investment is unlikely in the UK (or elsewhere) even once Brexit uncertainty has cleared. Indeed, our own medium‐term forecasts see business investment growth across major economies continuing to run at a relatively subdued pace.

     

An end to boom and bust - can the Chancellor deliver?

In his Mansion House speech, the Chancellor of the Exchequer emphasised his desire to avoid the boom and bust cycle that has characterised the UK economy in recent years. The objective of a more stable economy is one with which it is hard to disagree. It strikes a chord with all those who have to take long-term decisions in the business community. But can the Chancellor deliver? In this article, we argue that despite the changes to the government's economic policy framework in recent years, many of the causes of the past instability of the UK economy remain. And while the Chancellor seeks to retain short-term control of interest rate decisions, there is always the risk that political pressures on monetary policy will be an added source of volatility.     

Japan

An acceleration in global trade helped to boost Japanese GDP growth to 1.7% in 2017. But an expected slowdown in demand from China in 2018 means that the contribution from external trade will be lower this year. And while we expect growth to continue to become more broad‐based, with investment playing a prominent role, given the recent increase in protectionist tensions, we have revised down our forecast for GDP growth in 2018 to 1.5% (from 1.7% three months ago). With an expected slowdown in construction and a planned consumption tax hike in 2019, we forecast that GDP growth will ease further to 0.9% next year. The short‐term outlook is influenced by the following factors:

• Export growth easing over 2018 : exports grew by 6.6% y/y in yen terms in January–February 2018 combined, down from 13% growth in Q4 2017. While the slowdown was less marked in volume terms, with real exports up 5.2% y/y and imports 7.8% higher (in January–February), we see a smaller contribution to growth from net trade in 2018 than in 2017, as external demand cools. The recent easing in export growth is in line with our expectations following last year's acceleration. Our baseline is for trade momentum to ease through 2018 as Chinese import demand moderates. While US protectionist measures threaten the outlook, we believe that the overall impact of the likely US tariffs will be limited, as Japanese trade continues to shift towards Asia.
• Solid investment growth to continue : we expect the momentum behind business investment to remain solid in 2018, with growth of 2.9% little changed from the 3% recorded in 2017. Overall investment will be supported by strong corporate profits, construction for the 2020 Tokyo Olympics and high levels of confidence. Although dropping among large enterprises recently, overall business sentiment (and among SMEs) remains healthy and planned capex for fiscal year 2018 got off to a good start. Protectionism is also a downside risk to the investment outlook, but we believe that the actual impact on Japan will be limited.
• Weak wage growth to weigh on consumer demand : monthly data suggest that consumption has continued to edge higher this year. Moreover, rising employment in Q1 may provide additional upside momentum. However, despite a tight labour market, wage growth has been disappointing and we expect sluggish wage growth to constrain household demand and inflation going forward.

     

By force of demand: Explaining cyclical fluctuations of international trade and government spending

This paper explores the role of demand shocks, as an alternative to productivity shocks, in driving both domestic and international business cycles within the international real business cycle (IRBC) framework. In addition to those well-documented domestic business cycle fluctuations (e.g., the volatility and cyclicality of output, consumption, investment, labor hours, and labor productivity) and international business cycle properties (e.g., the countercyclical net export and the comovement puzzle), this paper focuses on two additional stylized facts in the industrialized countries: the procyclical trade openness (the GDP fraction of trade volume) and the countercyclical government size (the GDP fraction of government spending). Using a parsimonious dynamic stochastic general equilibrium model, we show that the model׳s predictions under productivity shocks are not consistent with these facts. Instead, a demand-shock-driven model replicates the above facts while matching other domestic and international business cycle properties. An estimated version of the model confirms the quantitatively important impacts of demand shocks.     

An Austrian Analysis of China's Unsustainable Boom

Austrian Business Cycle Theory can shed light on the ways in which the current Chinese economic boom is unsustainable. On the one hand, government interventions, such as land monopolies, have raised costs for real estate developers. By limiting the availability of investment instruments and access to external markets, government interventions have created a strong demand for housing as a hedging tool. On the other hand, a loose monetary policy and artificially low interest rates have made the property market tempting for developers. Over‐construction and over‐consumption in the housing sector epitomise the capital structure analysis that Austrian economists regard as the core of their business cycle theory.     

Interpreting shocks to the relative price of investment with a two-sector model

Consumption and investment comove over the business cycle in response to shocks that permanently move the price of investment. The interpretation of these shocks has relied on standard one-sector models or on models with two or more sectors that can be aggregated. We show that the same interpretation can also be motivated with a model that captures key features of the US Input–Output Tables and cannot be aggregated into a standard one-sector model. Our alternative model yields a closer match to the empirical evidence of positive comovement for consumption and investment subject shocks that permanently move the price of investment.     

House Prices and Housing Investment in Sweden and the UK: Econometric Analysis for the Period 1970–1998

We estimate quarterly dynamic housing demand and investment supply models for Sweden and the UK for the sample period 1970–1998, using an Error Correction Method (ECM). To facilitate comparisons of results between Sweden and the UK we model both countries identically with approximately almost the similar type of exogenous variables. The long–run income elasticities for Sweden and the UK are constrained to be 1.0, respectively. The long–run semi–elasticity for interest rates are 2.1 and 0.9 for Sweden and the UK. The speed of adjustment on the demand side is 0.12 and 0.23, while on the supply side it is 0.06 and 0.48 for Sweden and the UK, respectively. Granger causality tests indicate that income Granger causes house prices for Sweden, while for the UK there is also feedback from house prices to income. House prices Granger cause financial wealth for Sweden, while for the UK it is vice–versa. House prices cause household debt for Sweden, while for the UK there is a feedback from debt. Interest rates Granger cause house prices for the UK and Sweden. In both countries Tobin's q Granger cause housing investment. Generally, the diagnostic tests indicate that the model specifications were satisfactory to the unknown data generating process.     

UK Consumer Spending: Prospects for the Late 1990s

Over the last eighteen months, strong growth of personal consumption has fuelled the growth of the UK economy raising fears of a 1980s style consumer boom. The boost to consumption provided by "windfall gains" from building society conversions has added to these fears. In this article, Guglielmo Maria Caporale, Andrew Sentance and Geoffrey Williams discuss the forces behind this recent pick-up in consumption and assess the prospects for consumer spending in the late 1990s.     

Monetary and real causes of investment booms and declines

The 1900s have marked two major investment booms in the United States. The boom of the 1920s was followed by the Great Depression of the 1930s, in which investment demand fell sharply. The second boom, of the 1950s and 60s, has been followed by a period of lagging investment. The economics literature reflects two disparate schools of thought on long-term investment behavior: the accelerator theory and the monetarist theory. This paper develops an investment function that interrelates monetary and real variables. Analysis of the investment function identifies several powerful non-monetary forces that can trigger investment booms with subsequent collapse due to overexpansion. Money is shown to be a critical element in sustaining a boom, but monetary contraction during the succeeding decline appears to be a symptom rather than essential cause of investment stagnation. The results thus point toward an integration of the monetarist and accelerator theories.     

Effects of international trade on domestic employment: an application of a global multiregional input–output supermultiplier model (1995–2011)

The effects on domestic employment of international trade and the globalisation of supply chains are as politically controversial as they are empirically inconclusive. To estimate them we extend the global multiregional input–output framework by endogenising demand for both domestic and imported intermediates, private business investment and household non-durable consumption – or equivalently, we generalise the supermultiplier formula. The model accounts, in particular, for the employment consequences of economic integration and those channelled through integration. We estimate these foreign sector effects alongside those of domestic origin using a recursive hierarchical structural decomposition analysis and statistics from the World Input–Output Database and National Accounts that cover years 1995–2011. Focusing on Spain, Italy, France, Germany, the UK, the US, Japan and China we answer the following questions: To what extent did international linkages deriving from international trade affect domestic employment? Did domestic employment benefit from economic integration?     

A VERY PRIVATE BOOM

Last year output rose nearly S per cent, the fastest rate of growth since 1973. But domestic demand rose even more rapidly and has continued to outpace supply this year. Consequently, the current account of the balance of payments has moved into deficit. One feature of the present boom, which distinguishes it from its predecessors, is that it is private sector demand which is the driving force — the direct contribution of the public sector has been far less marked, even minimal. In this Forecast Release we examine the behaviour of private spending and contrast the present boom with previous experience. We conclude that there are sound theoretical reasons why UK private saving should be reduced for a shoe period and that, if the reduction is temporary, the government's apparently relaxed attitude to the current account deficit is justified .     

China and the UK Economy

China's boom has been a major pillar of the global economic recovery from early 2002 onwards. However, earlier this year fears that the economic boom was threatening to run out of control prompted the Chinese authorities to implement a number of targeted measures to try to restrain activity in the most overheated sectors. This article by Simon Knapp discusses both how much the UK has benefited from the China boom and how much it might be affected if the Chinese slowdown now becomes a hard landing. It argues that emerging Asia, Japan and raw materials producers have been the principal beneficiaries of the China boom, while the UK's gains have been small, because exports to the whole of Asia only account for 9% of the total. Equally, looking forward, the UK, and the UK's two major trading partners, the US and Eurozone, would only be relatively lightly affected if Chinese growth decelerated rapidly, as they would be helped by offsets such as lower oil prices and a lower interest rate profile. However, the current evidence suggests that the Chinese economy is slowing down in broadly the way the government wants, with the greatest deceleration in the previously overheated sectors but relatively little impact on the export and consumer sectors. An abrupt halt in bank lending could, however, still pose a significant downside risk.     

Oil exports and the Iranian economy

This paper presents an error-correcting macroeconometric model for the Iranian economy estimated using a new quarterly data set over the period 1979Q1–2006Q4. It builds on a recent paper by the authors, Esfahani, Mohaddes, and Pesaran (in press), which develops a theoretical long-run growth model for major oil exporting economies. The core variables included in this paper are real output, real money balances, inflation, exchange rate, oil exports, and foreign real output, although the role of investment and consumption are also analysed in a sub-model. The paper finds clear evidence for the existence of two long-run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. The results show that real output in the long run is influenced by oil exports and foreign output. However, it is also found that inflation has a significant negative long-run effect on real GDP, which is suggestive of economic inefficiencies and is matched by a negative association between inflation and the investment–output ratio. Finally, the results of impulse responses show that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets.     

Housing Wealth and UK Consumption

There is widespread disagreement about the role of housing wealth in explaining consumption. However, much of the empirical literature is marred by poor controls for the common drivers both of house prices and consumption, such as income, income growth expectations, interest rates, credit supply conditions, other assets and indicators of income uncertainty (e.g. changes in the unemployment rate). For instance, while the easing of credit supply conditions is usually followed by a house price boom, failure to control for the direct effect of credit liberalisation on consumption can over‐estimate the effect of housing wealth or collateral on consumption. This paper (Janine Aron, John Muellbauer and Anthony Murphyi, October 2006) estimates an empirical model for UK consumption from 1972 to 2005, grounded in theory, and with more complete empirical controls than hitherto used.     

Economic Viewpoint The Shape of the UK Recovery

Monthly economic data combined with the more optimistic tone of CBI and other surveys suggest that the recession may be drawing to a close. By the early summer it was becoming apparent that output was no longer falling; now it appears that the economy is in transition front the 'bumping along the bottom' phase, which lasted through the summer months, to the beginnings of a modest recovery in output and demand. The focus of interest is therefore switching away front the timing of recovery towards its shape and strength.
We have previously argued that the recovery would be led by consumer spending, that industry would not resume investment spending un ti1 demand elsewhere was picking up, and that although exports have held up remarkably well, taking some of the strain of the downturn in domestic demand, there was little prospect of a surge in world trade to provide the pre-conditions for an export-led recovery. What was and is needed is a recovery in consumer confidence, with a willingness to borrow at lower interest rates showing up in a reduction in the personal savings ratio.
But the recovery starts with the personal sector still having a large debt overhang from the 1988-9 boom, which will inevitably inhibit new borrowing. Meall while the credit crunch is restricting the ability of banks to lend. Together these imply only a limited response to the interest rate cuts of the last year and would, in the absence of the EMS link with high German interest rates, argue for further interest rate reductions. But high post-unification German rates put a floor under UK rates and will slow the recovery. The economy will do little more in 1992 than make up for the output losses of 1991 and our forecast (as in June) suggests that it will not be until 1993 that previous output peaks are passed and unemployment is stabilized.     

基于价值的企业管理模型——基于投资定价与实物期权理论

基于价值的企业管理是经济金融化环境下企业管理发展的一个必然趋势。如何完善这种管理模式,使之更有效地发挥作用是一个具有研究价值的问题。文中从基于价值的企业管理模式的精神与需要出发,指出DCF法在实施基于价值的企业管理中所表现出来的局限性,提出了实施基于价值的企业管理建立在以投资定价模型评估企业价值的基础上,是更为合理的选择;并且提出了采用实物期权定价法与折现现金流量法相结合的投资价值评估模式,进而构建出更为合理的基于价值的企业管理模型。     

The Relative Importance of Symmetric and Asymmetric Shocks: The Case of United Kingdom and Euro Area*

We show how a simple model with sign restrictions can be used to identify symmetric and asymmetric supply, demand and monetary policy shocks in an estimated two‐country structural VAR for the UK and Euro area. The results can be used to deal with several issues that are relevant in the optimal currency area literature. We find an important role for symmetric shocks in explaining the variability of the business cycle in both economies. However, the relative importance of asymmetric shocks, being around 20% in the long run, cannot be ignored. Moreover, when we estimate the model for the UK and US, the degree of business cycle synchronization seems to be higher. Finally, we confirm existing evidence of the exchange rate being an independent source of shocks in the economy.     

Boom time for British manufacturing investment

Andrew Sentance and Giovanni Urga review the performance of investment over the UK recovery and to date and discuss how the current upswing in investment will develop over the years ahead. By historical standards the economy as a whole is likely to see a modest investment recovery. But manufacturing industry is on the threshold of an investment boom which should see an exceptional period of growth in industrial investment.     

消费与经济增长的关系

消费对于经济增长有举足轻重的作用,消费逐日成为很多人所关心的话题,随着世界经济的不断衰退,在美国金融危机的影响下,我国经济也受到了较大的影响。消费,投资,净出口,我国经济增长的"三驾马车"。投资与净出口已经趋于较高水平,消费对于经济的重要作用愈来愈明显。本论文主要使用了我国1991-2005年的相关经济数据,使用消费模型分析了我国的消费对经济增长的影响,指出了我国经济发展过程消费需求不足的主要原因,并提出了在当前经济形势下扩大消费需求的对策建议。