Workshop on Business and Consumer surveys Bi-annual investment survey from a user perspective Malin Andersson and Desislava Rusinova European Central Bank Brussels,13 November 2014 European Commission

Rubric © Outline Welcome features and use of the survey Stylised facts Comparative forecast performance (compared to available proxies of business investment) Cross-check with other surveys such as ECB’s SAFE (Survey on access to finance for small and medium enterprises) Further issues from a user perspective 2 Biannual investment survey: outline

Rubric © Advantages and use of the survey for the outlook on investment 3 Welcome features of the EC survey: Rich detail on a disaggregated level (country, sector, size of company, combinations between these); Relatively long time series for the major countries and comprehensive coverage, survey started in 1966; Long horizon (1 year ahead) compared to other indicators Representativeness and large number of participating firms. Provides indicators for comparing real developments in small / large companies without resorting to micro data Useful aspects of the survey for the short-term outlook on investment: Dynamics by country and sector Factors influencing investment across time, country, etc. Company size Type of investment: extension/replacement

Rubric © Stylized facts by country / country groupings 4 Source: European Commission. There is large heterogeneity across euro area countries During the crisis there was high volatility and large revisions of investment plans, particularly in the stressed countries Expected investment growth in selected euro area countries (percentage changes) Italy and SpainGreece and PortugalGermany and France

Rubric © Stylized facts by country / country groupings 5 Source: European Commission. Euro area investment plans for 2014 points to a recovery Expected business investment growth for the euro area (percentage changes)

Rubric © Stylized facts by sector 6 Euro area: Business investment plans by sector (balances) Source: Industrial investment survey Apr/May 2014 Investment plans in the intermediate and investment goods sector show more pronounced cycles than in the consumption goods sector. Investment plans in the investment goods sector are overall less revised over time than investment plans in the consumption goods sector

Rubric © Stylised facts by firm size 7 Source: Industrial investment survey Apr/May 2014 Euro area: Business investment plans by firm size – patterns and difference in crisis impact (percentage change) Investment plans for larger and smaller firms follow different patterns in recent years Larger volatility/revisions for smaller firms Expectations for small firms remained overall less positive in the crisis

Rubric © Stylized facts: factors behind investment plans 8 Factors influencing investment (balances) Source: Industrial investment survey Oct/Nov 2013 Note: More positive numbers correspond to more supportive factors. ””Other” refers to various factors such as the impact of the economic policy, tax policy relevant for investment and the possibility to replace investment activities abroad. Demand was a constraining factor in , but remained generally supportive since; Financial factors have been perceived as modestly supportive recently; Technical factors appear to be supportive in general throughout the period.

Rubric © Stylized facts: structure of investment 9 Structure of investment (shares) Source: Industrial investment survey Oct/Nov 2013 Note: More positive numbers correspond to more supportive factors. Recently, the share of replacement investment is higher than average while the shares of extension and rationalisation investment are lower; The decline in extension/rationalisation investment is also observed in the absolute levels; Companies see little need to extend capacities and concentrate on maintaining existing ones.

Rubric © Comparison with investment from macroeconomic projections 10 What would be an appropriate equivalent variable to industrial investment in the macroeconomic projections? The European Commission forecast allows deriving a suitable narrow measure: o Private investment for the whole economy in current prices o Converted to constant (2010) prices o Minus investment in dwellings in constant prices o Gives real private nonresidential investment (RPNI) At the ECB, private non-residential investment is estimated/projected in a broadly similar way, by subtracting government and housing investment from total investment However, this breakdown is not published

Rubric © Stylized facts: Euro area evidence 11 Sources: European Commission.. Euro area: Business investment plans and real private non-residential investment (Autumn 2014) (percentage changes) There is a relatively good fit between the real private non- residential investment and investment plans

Rubric © Stylized facts: Country evidence 12 Sources: European Commission. Note: data for Ireland are not available. Euro area countries: Business investment plans for 2014, last two vintages (Q and Q2 2014) and RPNI projection for selected countries (Autumn 2014) (percentage changes) There is a large heterogeneity across euro area countries on the outlook for 2014

Rubric © Comparative forecast performance – 1 13 Correlation of investment plans in volume from the EC survey with actual growth in PRNI, 1996 – 2013 Countries : DE, FR, IT, ES, NL, GR, FI, AT, PT Results: The correlation strength varies substantially by country For some countries (DE, FR) and the euro area, the spring assessment of the same year is on average closely correlated with the final outcome. Source: European Commission. Note: The category “Overall” (line 2) refers to the overall panel correlation. Table: Correlation between the survey outcomes and actual outcomes for business investment

Rubric © Comparative forecast performance RMSE comparison: EC survey vs. respective vintages of RPNI forecast (real-time forecast) Previous year assessment: Oct/Nov survey vs. Autumn forecast The survey can provide orientation on the trends in investment early on; In some cases the RMSE of the early survey is lower than the projection; Germany: the early survey identified correctly that the recovery in 2010 would be more subdued than envisaged in the forecast; Same- year assessment: Oct/Nov survey vs. Autumn forecast: Not surprisingly, the full macroeconomic forecast is on average more precise Still, survey results can provide useful indication; Since 2011, for some countries (e.g. Germany) the same-year survey tends to over-predicts investment growth

Rubric © Comparative forecast performance Survey results (autumn previous year) vs. PRNI forecast (autumn previous year): Germany (LHS) and France (RHS) Source: European Commission. Survey results (autumn same year) vs. PRNI forecast (autumn same year): Germany (LHS) and France (RHS)

Rubric © EC survey vs. the SAFE 16 SAFE: ECB Survey on access to finance for small and medium enterprises SAFE: profits as a factor relevant for income generation, past six months (all charts: net percentage of respondents) SAFE: external financing needs for investment purposes EC survey: demand a s a factor EC survey: financial factors

Rubric © Main messages and potential policy implications from the survey 17 Large heterogeneities between countries, >> reflecting structural differences to be addressed by structural reforms… Persistent differences in support by factors between large and small firms, which seem to be broadly in line with SAFE results; >> measures needed to improve access to finance for SMEs… Although financial factors improved recently, they remain less supportive compared to demand and technical factors; >> EU wide initiatives to boost investment… The structure of investment points at subdued extension and rationalisation; rather: investment preserves existing capacities; >> implications for capital stock and long-term growth potential… Survey assessment from the autumn of the previous year already contains useful information on the expected dynamics of investment, especially for the large countries.

Rubric © Further issues from a user perspective 18 Values vs. volumes – how exactly are the growth rates in values corrected for inflation to reach growth in volumes? Growth rates of above 100% are hard to interpret/reconcile with projections and other indicators. Examples: Estonia (regularly), Greece in What are the responses of participants in these cases? Details on back data revisions? Impact of ESA2010? Future availability of missing countries (IE)? Factors influencing investment – it would be most useful if the question on factors would be included in both Spring and Autumn vintages: -Receive up-to-date information about what is constraining investment in the euro area/countries -The indications on influencing factors change relatively fast

Rubric © Thank you for your attention! 19