Global Daily – Manufacturing weakness is yet to hit investment

by: Aline Schuiling

Euro Macro: Business investment to contract in the coming quarters – Fixed investment growth in the eurozone has remained resilient despite the contraction in industrial production and the drop in business confidence during the past six quarters. The details for GDP growth and the components of fixed investment for Q3 have not been published yet, but the data for the first half of 2019 show that total fixed investment expanded by 4.1% compared to the second half of 2018. Consequently, it lifted total GDP growth in H1 (which was 0.7% HoH) by around 0.8 percentage points. Still, a number of factors are expected to weigh on fixed investment in the coming quarters. Indeed, we expect total investment to have contracted in Q3 and to continue to decline during the next couple of quarters. To begin with, investment in intellectual property (mostly in Ireland) is very volatile. It jumped by more than 26% qoq in Q2 and contributed 5 percentage point to total fixed investment growth of 5.6% qoq. Jumps like this tend to be followed by sharp contractions in the next quarter, so intellectual property investment will have dragged total investment lower in Q3.

Investment in machinery and equipment (including transport equipment) grew robustly in 2019H1 (by almost 2% compared ty 2018H2), but this part of investment is expected to decline in the coming quarters. To begin with, corporate profits growth has slowed down significantly in the past few quarters, while the capacity utilisation rate in industry has fallen from a peak level of 84 in 2018Q3 to 81.3 in 2019Q4, which is now below the post-crisis average. Moreover, business confidence in the main eurozone countries (with the exception of France) remained at subdued levels, and was well below the long-term average in October. Finally, a large number of early indicators for investment in machinery and equipment, such as the new orders component of the eurozone industrial PMI and Ifo’s business climate in the capital goods industry (as well as its component about orders on hand) are consistent with a contraction in investment in machinery and equipment. All that said, we expect residential investment to continue to expand in the coming quarters, and to limit the pace of the decline in total fixed investment. (Aline Schuiling)