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Investment led Growth: Expectations vs Reality

  • After the successful completion of the 1st review of the 3rd Economic Adjustment Programme, the discourse around the Greek economy turned - quite belatedly in our opinion – into how the Greek economy can escape the recessionary regime that it has been stuck in for the past 8 years and achieve the much coveted transition to an export-oriented and investment-based economic growth model.

  • In this respect we have seen a number of studies advocating that investment led growth is imminent, based on the simplified argument that – when compared to the recent past – the level of investments in the Greek economy seems quite depressed. Our view is that – although we have great belief in mean reversion- investments do not materialize out of thin air. Instead they are made for a reason and when condition are favourable.

  • Hence the aim of our study is twofold: first we intend to investigate the factors that drive the most dynamic and productive part of gross fixed capital formation, namely the “private non-residential” investments in the short and medium –term. Secondly looking to the long-term we attempt to estimate the equilibrium level of investment activity that is in line with the new long-term potential GDP growth of the Greek Economy.

  • In the first stage, we focus on non-residential private investments and attempt to identify the factors that determine the level of investment activity in the short term and to quantify the relationship between investments and these factors. The main conclusion we draw is that, if we aim to achieve a 10% increase in non-residential private sector investments (i.e. €1.2bn., approximately the 1997-2008 average), the following are required:

    • An increase in net lending of €7.7bn.
    • An increase in excess demand (consumption & exports) of €8.1bn.
    • A reduction in the real interest rate of 1.8%.
    • An increase in Public Investment Program PIP) spending of €2.0bn.
    • An improvement in the business climate stability index of 4.3 points.


  • The second stage of this study complements the first, and focuses on estimating the share of investments to GDP (I/Y) that should be reached over time in order for the investment rate to be in equilibrium and consistent with the long-term growth potential of the Greek economy. Assuming that the long-term growth rate of Greek GDP is 2.2%, then:

    • In 2020, we estimate that the ratio Ι/Υ will increase to 23.4% from 11.6% in 2015, but it will remain lower than the historic high level of 24.6% achieved in 2007.
    • We expect €201bn investments for the 2016-2020 period or €40bn per year, up from €30bn - per year recorded - during 2009-2015.
    • Despite our forecast for a substantial increase in investments over the next five years, we anticipate the divestment process to continue until 2020, as depreciation continues to dominate new investments. This will result in a decline in the value of the accumulated net capital stock down to €760bn by 2020.
    • Going forward to the 2021-2030 period, an increase of €185bn in the net capital stock will be the result of €528bn of new investments (€53bn per year) minus €343bn of depreciation.

Ilias Lekkos

Group Chief Economistt