Driven by a pickup in construction, as France and Italy finally begin to catch up, a euro area rebound in capex is in the works, Citibank analysts write Friday:
“EA Capex Rebound: What, Why, How Long?
GDP Recovery (Finally) Broadening Out To Investment…
After years of historically low investment growth, capital expenditure in the Eurozone is starting to pick up more meaningfully, partly catching up with the post-crisis cycle in other advanced economies. The acceleration is driven by construction, which stopped downsizing, while business equipment continues to expand strongly. The rebound is broad-based across countries, as long-standing laggards France and Italy catch up.
…amid Policy Support and Confidence Boost
The ECB’s significant monetary policy loosening since 2014 is probably the most important driver of the capex rebound, in our view, alongside a brightening global outlook. The ECB stimulus loosened financing conditions and lifted internal sources of funding. More supportive fiscal policy, via tax incentives and initiatives like the Juncker Plan, is also helping. The improving economic outlook and receding political risk may also have worked in lifting animal spirits in 2017.
Capex Recovery To Press Ahead
Signals from surveys point to further positive momentum ahead, as the output gap continues to narrow, adding to firms’ capex expansion needs. Only a marked deterioration in economic sentiment or a sudden change in fiscal/monetary policy mix (unlikely, in our view) may derail the capex recovery. Stronger investment will eventually add to the stock of capital and hence lift potential output growth in coming years. This could boost labour productivity and ultimately increase non-inflationary wage growth.”