By Simon Whitaker of the Bank’s Structural Economic Analysis Division.
Trends in investment are important for two reasons. First, investment adds to the capital stock, and helps to determine how the supply potential of the economy grows over time. This rate of growth in turn determines the rate at which demand can grow on a sustainable basis without inducing inflationary pressure. Second, investment is itself a component of demand (accounting for about 17% of GDP).
This article explores why investment has contributed less to this recovery than to the previous one, and has fallen as a share of GDP. It considers various economic variables that theory suggests should affect investment, and uses these to try to account for recent trends. The article distinguishes between two sets of arguments: those that relate to how the desired capital stock has grown during this recovery compared with the previous one, and those that explain how firms may have begun this recovery at a different point relative to that desired capital stock. Finally, it discusses problems in measuring investment that complicate the analysis of published data.