Main Drivers of the Recent Decline in Italy's Non-Construction Investment

Abstract

This paper examines the causes of the exceptionally marked fall in non-construction investment in Italy since 2007. Non-financial private services were the main driver of the decline in the aggregate investment rate, but all sectors weighed in negatively; the reallocation of value added away from industry was a further drag on investment. In concordance with survey findings, an aggregate model of investment indicates that even during the recent double recession the most important driver of capital accumulation was demand conditions. The user cost of capital had a substantial negative impact in the acute phases of the sovereign debt crisis, but since 2013 its contribution has been positive, thanks to the ECB’s expansionary monetary policy. The constraints on capital accumulation imposed by tight credit supply conditions were particularly severe in 2009 and 2012. Finally, uncertainty provided a sizeable drag on investment growth not only during the global financial crisis but also in the last two years. The significance of these determinants of investment is confirmed also by a disaggregated model for the thirteen manufacturing branches.