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Fixing Fixed-Investment Incentives

LONDON – Back in February, I noted that the global economy at the end of 2016 was in a stronger cyclical position than most people had expected, given the political upheavals of the previous 12 months. That upward momentum carried through to the first quarter of 2017. According to the latest “nowcast”-type indicators, world GDP growth is exceeding 4% – perhaps the strongest performance seen since before the 2008 financial crisis.

Still, some observers – and not just chronic pessimists – have countered that the evidence remains anecdotal, and that it is impossible to predict how long the current economic moment will last. Indeed, there have been other periods in the long post-2008 recovery when growth returned, only to peter out quickly and become sluggish again.

To bolster long-term economic growth, business investment will have to increase. Unfortunately, this is easier said than done. In Western economies in particular, non-residential fixed investment is precisely the factor that was missing in previous, short-lived cycles of acceleration.

No one can say for sure why non-residential business investment has failed to recover in recent years. But I suspect that the slightly pessimistic conventional wisdom on this question is wrong.