Drop in long-term investment hits Eurozone recovery
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.