F di mauro

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Filippo di Mauro European Central Bank

Euro Growth and Investment: a firm-level perspective Global Interdependence Center Banque de France

“New Policies for the Post Crisis Era�

Paris, 23 March 2015

Disclaimer: the opinions expressed in this presentation are those of the author and do not necessarily reflect the views of the ECB of the European system of Central Bank.

Rubric Introduction

• Sluggish economic activity and gloomy potential growth estimates fuel in Europe an active debate on secular stagnation and in particular on the current drop in investments • What are the underlying factors of this decline?

• Are there any positive signs for the medium term outlook?

• Will report on some micro evidence on resource reallocation which points in the right direction

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Rubric Substantial downward shock to potential growth

• Output in the euro area remains below pre-crisis levels • All projections put the euro area’s rate of potential growth lower than before the crisis

Sources: Summers, L. (2014). “Reflections on the ‘New Secular Stagnation Hypothesis”, VoxEU

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Rubric area investment: weak demand Euro

• The weak growth dynamics in the euro area is mainly due to weak investment

• Substantial drop particularly in firms’ investment

Investment by sector, % of GDP Households

Government

Firms

Sources: AMECO. D. Gross, CEPS policy brief

Sources: European Commission Autumn forecast (2013)

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Rubric Diverging paths across euro area economies

• Evidence also in novel CompNet firm-level data • Firms in stressed euro area economies experienced a more severe decline of investments during the crisis Firms' investment ratio across Euro area countries

.1

.15

.2

.25

Median values

2001

2003

2005

2007 year

2009

2011

NON-STRESSED: Germany, France, Belgium, Finland STRESSED: Spain, Portugal, Italy, Slovenia

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Rubric area productivity gap Euro

• Low investment demand is reflected also in a widening productivity gap of Euro area compared to US. Big drop and sluggish pick up after crisis • Within EA, we find very differentiated patterns between stressed and other EA countries.

TFP growth in selected euro area countries and US (Annual average GDP growth in various sub-periods; 2000-2014 projected)

Euro Area

Stressed

Non stressed

US

2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 -2.5 -3 2000-2007

2008-2009 6

2010-2014(p) www.ecb.europa.eu ©

Rubric Is stagnation inevitably “secular”?

• Are these trends truly “secular”? Is there any room for policies?

• While long-term demographic trends appear largely irreversible (dependency ratio are expected to continue rising), outlook for investment may be changed:

1. Lower cost of capital - ECB’s comprehensive assessment - new Single Supervisory Mechanism - completing the single capital market to overcome financial fragmentation

2. Productivity gains from structural reforms - foster intra-firm productivity growth - enhancing resources reallocation within and across sectors

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Rubric Resources reallocation

• New micro-level data from the Eurosystem’s Competitiveness Network (CompNet) shows a very high dispersion of productivity levels between firms within European economies (with a few highly productive firms and many which have low productivity) Kernel density

-5

x 10

AUSTRIA BELGIUM FINLAND FRANCE GERMANY

4 3.5

7 6

density

density

2.5 2

5 4

1.5

3

1

2

0.5

1

0

1

2

3

4

5

normalized labour productivity

6

ITALY PORTUGAL SPAIN

8

3

0

Kernel density

-5

x 10

0

7 4

x 10

0

1

2

3

4

normalized labour productivity

5

6 4

x 10

• This reinforces the idea that also higher allocative efficiency of labour and capital would open the way to substantial productivity gains. www.ecb.europa.eu ©

Rubric allocation efficiency Credit

Is credit allocated to the most productive firms in a sector?

Has this changed over the crisis?

• Firm’s level of credit constraints is negatively related to its labour productivity • After the crisis, the number of credit constrained firms has largely increased in stressed countries while in non stressed ones this increase was limited to the least productive firms. share of credit constrained firms by deciles of labour productivity non-stressed

stressed

Least productive

10

20

20

30

30

40

40

50

50

60

60

70

70

80

80

90

90

100

100

deciles of productivity

10

Most productive

0

.05

.1

.15

.2

.25

0

Pre-crisis

.05

.1

.15

.2

.25

Crisis

2004-2008, 2009-2012, 20E sample; non-stressed: BE DE FI FR; stressed: ES IT SI

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Rubric market reallocation Labor

Has the Great Recession been cleansing?

Yes. Clearly observable within the Construction sector:

• but the change in share of labour was positive for most productive firms and negative for less productive ones

• employment in absolute terms decreased across all firms

change in employment by deciles of lprod - before /during crisis change in share of labour by deciles of lprod - before /during crisis construction non-bubble (BE, DE), Construction

construction

bubble (ES, PT), Construction

non-bubble (BE, DE), Construction

bubble (ES, PT), Construction

10

10

10

10

20

20

20

20

30

30

30

30

40

40

40

40

50

50

50

50

60

60

60

60

70

70

70

70

80

80

80

80

90

90

90

90

100

100

100

100

-.6

-.4

-.2

0

.2

-.6

-.4

-.2

0

.2

-.01

% change in total l

Belgium and Germany

0

.01

.02

.03

.04

-.01

0

.01

.02

.03

.04

% change in labour share

Portugal and Spain

Belgium and Germany 10

Portugal and Spain www.ecb.europa.eu ©

Rubric Concluding remarks

• Outlook for the Euro area continues to be rather subdue, though improving • Key is triggering growth in productivity • This can happen also via structural reform promoting more efficient resource allocation to the most effective use • Some micro evidence in increasingly showing that this may be happening

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Rubric

Thank you!

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