One of the four components of domestic demand, which includes spending on final goods and services by households, businesses, and the government, is fixed capital formation.
As Eurobank writes in its regular publication on the Greek economy, in addition to domestic demand, fixed capital formation enhances the productive capacity of an economy as it accumulates physical capital, i.e., increases the number of machines, transport equipment, factories and other capital goods that can be used in the production process. Consequently, fixed capital formation has a twofold effect on the economy. They affect both demand in the present and potential supply in the future.
As has been analysed many times in the press and in the academic literature, during the Greek debt crisis, fixed asset investments suffered heavy losses. The prolonged uncertainty, the decline in incomes (and hence in business sales), and the contraction of financing go some way to explaining this result.
Fixed asset investment fell from 25.5% of nominal Gross Domestic Product (GDP) in 2007 (23.0% in the euro area) to 11.4% of GDP on average over the 7-year period 2013-2019 (20.2% in the euro area). Nevertheless, in the 4-year period 2020-2023, i.e., the period of the pandemic, the energy crisis and geopolitical tensions, fixed asset investments recovered, with their share in GDP rising to 15.2% in 2023 (34.2 billion in current prices, based on the new revised data of the Hellenic Statistical Authority).
A proportion of the increase is inflationary, i.e., it comes from price increases (more expensive houses, more expensive machinery, more expensive mechanical equipment, etc.). In particular, fixed capital formation in current prices increased cumulatively by 68.1%, while in volume terms it increased by 53.4%. Over the same period, the deflator of fixed asset investment increased by 9.6%.
Housing made up 36.4% of the increase in fixed capital formation among the 7 aggregate categories of capital goods, while agricultural products made a marginally negative contribution. Machinery and weapons systems came in second with 19.1%, other construction came in third with 16.8%, other products came in fourth with 12.1% (research, development, and innovation expenditure), information and communication technology equipment came in fifth with 12.1%, and transport equipment came in sixth with 3.6%.
Consequently, capital goods other than housing contributed 63.6% of the boost in fixed asset investment from 11.0% of GDP in 2019 to 15.2% in 2023. What factors can explain this result? There are four potential causes: the low fixed asset investment share, the pandemic-accelerated structural changes in the economy (digitalization), the Recovery and Resilience Fund (RDF) funds and credit expansion of domestic monetary and financial institutions, and fiscal stability, which forms expectations to prevent unfavorable fiscal surprises in the future.
Due to the dual impact of fixed capital formation on the economy, the sharp decline in fixed investment in the early years of the 2010s and its prolonged stagnation thereafter not only affected GDP in each year but also the productive potential of the economy. Every year, a percentage of total capital equipment is depreciated and withdrawn from production. Material wears out and technology evolves, with the result that a proportion of accumulated capital becomes less productive and more costly, reinforcing the incentives of firms to withdraw it from production. If firms do not replace the worn-out or technologically obsolete capital, they record negative net investment flows, and the capital stock of the economy declines. This is what happened in the Greek economy as a whole from 2010 to 2021.
From 2010 to 2021, net fixed investment for the Greek economy as a whole was consistently negative. That is, annual fixed asset investment was not enough to replace capital withdrawn from production. As a result, the value of all capital equipment decreased by €88.7 billion at current exchange rates. The corresponding amount before the revision of the Greek Statistical Authority (ELSTAT) data was €95.0 billion.
In the last two years, net fixed asset investment has returned to positive territory for the first time since 2009. In 2022, it stood at €2.7 billion. (1.3% of GDP) and in 2023 at €4.6 billion. (2.1% of GDP), strengthening the capital endowment of the economy. The reduction in the capital stock relative to 2009 was €81.3 billion in 2023, down from €88.7 billion in 2021. Excluding the institutional sectors of households (mainly residential investment) and financial corporations, the contraction of the economy's capital stock was much smaller at €26.2 billion in 2023 (€37.3 billion in 2021).
This "net fixed asset investment gap" is 68.6% from non-financial corporations and 31.4% from the general government. Expanding the productive capacities of the Greek economy by increasing productive physical capital, human capital and productivity is an important medium-term challenge.
