Drop in long-term in­vest­ment hits Eu­ro­zone re­cov­ery

The Pak Banker - - BUSINESS -

The Euro­pean Cen­tral Bank's at­tempt to kick-start the Eu­ro­zone econ­omy is fac­ing a stub­born re­luc­tance among com­pa­nies to in­vest, with many pre­fer­ring to hoard cash or buy back their own stock, ac­cord­ing to re­search.

The ECB faces a para­dox as its ag­gres­sive mon­e­tary eas­ing has low­ered com­pa­nies' re­turn on in­vest­ments, leav­ing them strug­gling for vi­able, long-term projects, ac­cord­ing to Moody's An­a­lyt­ics.

"Although the ECB's ac­com­moda­tive mon­e­tary pol­icy aims to sup­port lend­ing, the pol­icy, maybe un­in­ten­tion­ally, re­duced the re­turn on fu­ture in­vest­ment and un­der­mined in­vest­ment growth,'' said To­mas Holinka, an economist at Moody's An­a­lyt­ics. Un­til re­turns in­crease, the re­port con­cludes, "weak in­vest­ment growth will re­main a drag on long-term po­ten­tial growth in the Eu­ro­zone".

Re­turns on fi­nan­cial as­sets from high-qual­ity gov­ern­ment debt to the riski­est cor­po­rate bonds have fallen as the world's cen­tral banks, in­clud­ing the ECB, have flooded fi­nan­cial mar­kets with tril­lions of dol­lars since the fi­nan­cial cri­sis.

In­vest­ment in the Eu­ro­zone has plunged since then and has re­mained weak. In 2008, the year US in­vest­ment bank Lehman Broth­ers col­lapsed, in­vest­ment in equip­ment and in­fra­struc­ture ac­counted for 23 per cent of col­lec­tive gross do­mes­tic prod­uct. Last year it was 19.5 per cent, ac­cord­ing to Euro­stat, the EU's sta­tis­ti­cal of­fice.

Many busi­nesses have used prof­its to re­pay debt, fund share re­pur­chases or sim­ply build up cash piles.

Ger­man com­pa­nies have al­most dou­bled re­tained prof­its since 2006, while other Eu­ro­zone com­pa­nies have also in­creased re­tained earn­ings since 2014, with Por­tuguese groups lead­ing the gain, ac­cord­ing to the re­port.

The vol­ume of share buy­backs re­mains un­der the peak of eq­uity re­pur­chases in 200708, but Dutch and es­pe­cially French en­ter­prises in­ten­si­fied them in 2014, while Span­ish re­pur­chases have re­mained at con­stant his­tor­i­cal highs. Still, buy-backs have been fall­ing since 2012 in Ger­many.

The tepid in­vest­ment cli­mate adds to the chal­lenges fac­ing the ECB and other Eu­ro­zone pol­i­cy­mak­ers as they seek to un­clog credit and spur an in­cip­i­ent eco­nomic re­cov­ery in the bloc. The euro area econ­omy grew by 0.4 per cent in the first quar­ter of 2015 com­pared with the pre­vi­ous quar­ter, ac­cord­ing to Euro­stat.

The Euro­pean Com­mis­sion is pre­dict­ing growth of 1.5 per cent in 2015. But fac­tors such as years of low in­vest­ment, a dearth of struc­tural re­forms, a rise in longer-term un­em­ploy­ment and lin­ger­ing fears of Greece quit­ting the Eu­ro­zone are all weigh­ing on the re­gion's eco­nomic growth ca­pac­ity.

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