A disaggregated view of the cyclical developments in euro area investment

Gross fixed capital formation is a key factor for economic growth from the standpoint of supply and demand. Thus, agents’ decisions about the amount of investment net of depreciation determine the stock of capital built up by an economy and, therefore, affect production capacity, a growth driver. On the demand side, a considerable proportion of the resources generated by an economy is earmarked for gross fi xed capital formation. In the specifi c case of the euro area, since the eighties investment has represented approximately one-fi fth of GDP and its average annual growth rate, of approximately 2.3%, has been similar to that of GDP. Any analysis of total gross fi xed capital formation is highly complex, given the heterogeneity of its constituent parts. Firstly, total gross fi xed capital formation can be used to replace that portion of capital which has been depreciated or to increase the existing stock of capital. Secondly, the volume of total investment is the sum of aggregating the decisions of different agents (corporations, households and public administration). Lastly, gross fi xed capital formation includes various types of assets of a very different nature. For example, construction investment may be severely affected in the very near term by weather conditions and is characterised by long lead times, in contrast to the relative immediacy of equipment investment. This article reviews the cyclical behaviour of euro area investment in relation to that of GDP since the nineties from a disaggregated viewpoint by purpose, the agent undertaking the investment and the type of asset in which the investment is made. To this end, the next section outlines the most notable features of developments in GDP and of total gross fi xed capital formation in the euro area since the eighties; followed by a description of the recent behaviour of the various investment components; then a cyclical analysis is made of the various items of gross fi xed capital formation, for which real data are available in relation to GDP, and, lastly, the main conclusions are presented.