Investment, crucial for growth

In developed economies, the economic situation is characterized by a combination of exceptionally low real and nominal interest rates and a persistently sluggish economy which, in the case of the euro area, has led to a double-dip recession.

In the Dossier of this Monthly Report we examine the many different reasons for such low interest rates, particularly the ultra-lax monetary policies of the leading central banks but also the high levels of savings generated in some of the world's main economies, both developed and emerging.

The challenge faced by developed economies is to ensure this situation of low interest rates not only helps make the necessary deleveraging in which they are immersed easier to bear but that it also encourages investment, a crucial variable for a sustained economic recovery to come about.

In the case of the Spanish economy, the role that can and must be played by business investment is even more important, if possible, given that the country's high level of debt will make it difficult for consumption to pick up.

In our central forecast scenario, which predicts a –1.4% drop in GDP this year with an improvement up to 0.8% in 2014, investment (except in the construction industry) plays an important role as this is the first component of domestic demand that will support growth in the second half of 2013. Its relative weight in GDP is naturally modest but its importance as a driving force for the economy is crucial.

What are the factors that lead us to believe investment will boost the dynamism of Spain's economy in the immediate future?

The first is that we expect conditions for the Spanish economy to access international financial markets to improve over the next twelve months. Since the second quarter of 2012, the risk premium has fallen by more than 200 basis points and this is expected to continue, albeit with some fluctuations, over the coming year, probably with an additional fall of 100 points.

Secondly, as we also discuss in the Dossier this month, in the past business investment has suffered the consequences of the brutal drain on resources supposed by the real estate boom. In Spain's case this sector will obviously take many more months to become a driving force for investment.

The excellent results achieved recently by Spain's export sector, with an average contribution to GDP growth of 2.1% since 2009, suggest that these firms will invest in maintaining and improving their competitiveness in international markets. The investment pattern observed for Spanish firms in relation to their export activity suggests this will be the case.

Last but by no means least for an economy such as Spain's that needs sustained flows of international capital, another crucial element will be its capacity to attract new international investors that are prepared to put their money into Spain with a medium and long-term view. In this respect, the net balance of foreign direct investment has not performed badly over the last few years but it still needs to improve and become the launch pad for the recovery in investment. The adjustment occurring in asset prices in Spain plays in its favour, helping to devise a political and economic agenda that should attract the interest of international investors, particularly from emerging countries which, as examined in the Dossier, are the new leading lights of direct foreign investment.

Jordi Gual

Chief Economist

31 May 2013