Private investment – an analysis of individual data on non-financial corporations
The Czech economy has been strongly affected in recent years by swings in investment activity. While government investment has mainly followed the EU funding cycle, private investment has been affected by a larger number of factors. This box aims to identify those factors and determine the direction in which they have acted and their significance. The analysis draws on quarterly individual data on the financial results of non-financial corporations with 50 employees or more in 2008–2015.1 From the methodological perspective, Bayesian VAR models are used. Individual data are an alternative to aggregate data from the CZSO’s national accounts. Moreover, their nature enables us to estimate impulse responses at the industry level.
Given the degree of openness of the Czech economy, it is reasonable to assume that a large proportion of private investment can be explained by changes in external demand. Derived impulse responses confirm this assumption (see Chart 1). Taking into account the sizes of the different shocks, it is clear that external demand is the main driver of private investment. An increase in external demand leads to growth in private investment in all major sectors of the Czech economy. The biggest responses were recorded in manufacturing (especially the automotive and electrical engineering industries) and tourism (see Chart 2). As investment decisions tend to have long-term consequences for firms, they are planned carefully and expectations of future developments play a significant role in them. The analysis reveals that private investment is directly proportional to economic sentiment in the EU, which captures such expectations. However, the magnitude of the response to a 1% shock is smaller by comparison with actually observed external demand.
Chart 1 (BOX) Impulse responses of private investment to different shocks
Private investment records the biggest positive response to an increase in external demand
(responses in % to a shock of 1%, or 1 pp in the case of the real interest rate; horizontal axis – number of quarters)
Chart 2 (BOX) Impulse responses of private investment in selected industries to an increase in external demand
An increase in external demand leads to growth in investment activity above all in manufacturing and tourism
(responses in % to a shock of 1%; horizontal axis – number of quarters)
Fluctuations in the drawdown of EU funds by the corporate sector affect its investment in the same direction (see Chart 1 and also Box 1 in Inflation Report IV/2016). This is confirmed by an analysis of government capital transfers to non-financial corporations linked with co-financing of investment from EU funds. A direct analysis of individual data on the acquisition of tangible and intangible assets by non-financial corporations arrives at the same conclusions. An increase in the drawdown of EU funds for private firms has a positive effect on investment above all in manufacturing, especially in the automotive, chemicals, electrical engineering and metallurgy industries, and also in the heavy engineering and other means of transport industries.
At the same time, the impulse responses point to a negative effect of government investment2 on the investment behaviour of private firms. This can be explained by the crowding-out effect whereby a rise in government investment is accompanied by a rise in the real interest rate. The crowding-out effect is most visible in manufacturing and agriculture (see Chart 3). By contrast, the construction industry, which implements most government investment, responds positively to a rise in government investment. When compared with the importance of external demand for private investment, however, the effect of drawdown of EU funds by the corporate sector, and partly also the effect of government investment, can be considered marginal in the long run. In a situation of significant swings in the drawdown of EU funds in the short run, however, their effect on private investment can be crucial.
Chart 3 (BOX) Impulse responses of private investment in selected industries to an increase in government investment
Government investment partially crowds out private investment, especially in manufacturing and agriculture, but supports investment in construction
(responses in % to a shock of 1%; horizontal axis – number of quarters)
The monetary conditions are the final category of factors affecting private investment. As expected, an increase in the real interest rate has a negative impact on private investment in most of the industries monitored.3 A weakening of the real effective exchange rate of the koruna is one of the most important factors and has a positive effect on private investment. Export-oriented industries and tourism respond particularly strongly in this way (see Chart 4). With regard to private investment, the increase in price competitiveness of exporters thus outweighs the effect of higher prices of imported capital goods as a result of exchange rate depreciation.
Chart 4 (BOX) Impulse responses of private investment in selected industries to a weakening of the real exchange rate
A weakening of the real effective exchange rate of the koruna has a positive effect on investment growth in export-oriented manufacturing industries and tourism
(responses in % to a shock of 1%; horizontal axis – number of quarters)
1 On average, the sample contains 9,200 firms in the period under review.
2 Government investment includes EU funds drawn by the government sector but excludes those drawn by the corporate sector.
3 However, a comparison with the effects of other variables must take into account the fact that an interest rate increase of one percentage point, not 1%, is considered.