Unfavourable investment data – risks to economic growth?

Future potential economic growth is a factor of key importance in judging the expected output gap and the inflationary pressure it entails. One important element of potential growth is the level and growth of real capital, which is materialized via investment. The tendency of investments thus provides an indication on the future potential growth. On the other hand, investments in the economy are part of aggregate demand, and thus in addition to its impact in the future, it also affects the present output gap and inflationary pressure. Finally, investments also offer insight into the expectations of economic actors regarding future prospects. The decline in the volume of investment registered in 2006, unprecedented in the last ten years, thus has particular significance from the central banks' perspective. This decline was experienced in a wide range of breakdowns: among the types of investment assets (construction, machinery purchases) as well as in corporate and household sector private investment. The drop in the household and non-tradable corporate sectors is in line with weak domestic demand resulting from the fiscal adjustment. But the fall of investment in the tradable sector is surprising in light of the favourable current state of and outlook for European economic activity. Although there was a modest correction in this trend in the first quarter of 2007, a lasting weakness in capital expansion may indicate the long-term presence of a disadvantageous investment climate in Hungary.