Investment spending in advanced economies
has collapsed in this recession?real privatesector
investment in the G4 (US, Euro-zone,
Japan and UK) has fallen by 25% from its
peak, accounting for more than 75% of the
peak-to-trough decline in real GDP. If the
global recovery is to be strong and sustained,
private-sector investment will also have to
play an important role in the upturn.
The existence of spare capacity is unlikely, in
itself, to hold back a recovery in investment
spending: the sharpest accelerations in G4
investment in the past 30 years took place in
1983, 1992 and 2002?corresponding to the
largest observed output gaps in each of the last
three global recessions. While firms with spare
capacity may not wish to expand their capital
stocks, many will still need to accelerate gross
investment spending just to stabilise those
stocks at a lower level. Such has been the
collapse in business investment spending in
this downturn that gross investment is no
higher than depreciation, implying no growth
in the G4 real capital stock.
That investment spending has fallen to the
replacement rate provides one reason to expect
it to rise in the future. This has also coincided
with an improvement in the underlying drivers
of investment spending: the global return on
capital has fallen by less than in past
recessions and is now rising, borrowing costs
are low, financial conditions easy and a rise in
the G4 ?q-ratio? (the market value of installed
capital) suggests that the market will reward
companies that invest in new capital.
The biggest challenge for global investment
spending is not the demand to invest but
whether firms have the ability to fund that
demand. However, there are also encouraging
signs on this front: corporate free cash flow
has risen sharply and lending conditions have
begun to ease across the G4.
Recession Led by a Collapse in Investment
The recession in advanced economies has been led by a
collapse in private-sector investment. Total private
investment (business fixed investment, housing and
changes in inventories) has fallen 25.0% from its peak in
the G4 economies (the US, Euro-zone, Japan and the
UK).1 Housing has obviously played a key role in this
decline but total business investment has fallen by a
similar amount (24.9%).Of course, private consumption accounts for a much
larger share of GDP, so smaller changes matter more:
over the past 30 years, real private consumption has
averaged 62% of G4 GDP, whereas real private
investment has accounted for 17% and business
investment just 12%. But, even adjusting for their relative
sizes, investment spending has still accounted for a
greater share of business cycle volatility than
consumption spending.

Given the significant trade linkages among
European countries, stronger global growth and the
increase in trade activity, particularly with Asia, have
added a self-reinforcing element to the upswing.
The weaker than expected Euro, reduced
inventories, and better labour markets should also
help growth. At the same time, we remain aware of
the many structural challenges in the region,
including the ongoing fiscal concern

The US is still benefiting from substantial policy
support. Fed policy remains easy and the multiplier
effects from earlier fiscal policies are still rippling
through the economy. After 2010Q2, the onus for
growth will fall much more heavily on final private
demand. Housing remains mired in excess supply,
bank lending is still depressed, and employers are
reluctant to hire. Still, there may be upside risk to our
outlook if strength in final sales continues from Q1