Economic Update: Contrasting E7 and G7 investment trends


Global Economy Watch - August 2014

Africa: Growth is on the horizon but where should you look?


G7 investment was hit the hardest… 

In the aftermath of the global financial crisis, investment levels among the advanced and emerging economies fell. Figure 2 shows investment by households, businesses and governments in the G7 dropped by around 15% in real terms between 2007 and 2009 and still remain below pre-crisis levels. This contrasts with the experience of the E7 (the seven largest emerging economies), which also suffered a temporary drop in investment activity, but rebounded strongly soon after the peak of the crisis in late 2008.

Part of these diverging trends can be explained by the policy response. In the E7, most governments adopted stimulus measures to counter the slowdown. They could do this because, as at the time, they had relative low public debt to GDP ratios. In China, for example, the government measures that were announced were in excess of half a trillion US dollars, centred around  large scale infrastructure projects.

However, in the G7, households, businesses (and later governments) reacted by cutting down on their investment expenditure and using the proceeds to pay down their high levels of debt.

…but is staging a modest rebound

After years of private and public balance sheet restructuring, our analysis shows there's been some modest pick-up in investment in the G7 in recent years. Sustaining this will be key to keeping the recovery going. At the same time, except for China, Figure 2 shows that E7 investment growth has largely stalled in recent years as some emerging economies have run into headwinds since 2011.

For G7 businesses, stronger demand growth and rising capacity utilisation levels mean that investment will need to continue to rise, not just in machines and buildings but also in people and skills, which are key to corporate success in increasingly services-driven economies.