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Investment Is Growing at a Pace Not Seen Since 1998. What is Its Composition?

28 February 2018

Despite its historic increases, the investment in Portugal in 2017 has not yet reached the levels recorded in 2011. However, an acceleration in the activity in the construction sector has made the most significant contribution to the current growth.

The level of investment in Portugal is still below the numbers registered before 2012, one of the peak years of the crisis. But 2017 was a decisive year in the recuperation of the economy. Gross fixed capital formation, or investment in the country, grew by 8.4% last year. It’s necessary to go back to 1998 to find annual growth at such a level. But what is the composition of this investment?

Data for the Portuguese national accounts released on Wednesday by the National Statistical Institute (INE) confirmed two new highs: for GDP and investment. However, they have yet to entirely make up for the losses that the Portuguese economy suffered during the years of the financial crisis. Investment remains just below the total for 2011, returning recently to levels comparable with those seen back in 1996.

INE points out that investment was the primary motor of domestic demand, which in turn contributed decisively to GDP’s growth of 2.7% in 2017. “The contribution of domestic demand increased to 2.9 pp (1.6 pp in 2016), largely reflecting the acceleration of investment to an increase of 8.4% (0.8% in 2016),” the INE reported Wednesday.

This growth in gross capital formation translated into an additional 2.4 billion euros of investments in Portugal compared to 2016. In total, more than 30 billion euros were invested. One would need to go back to 1998 to find a higher tally (13.4%). At the time, investment in the country increased by 4 billion euros.

But which areas of the Portuguese economy have invested the most? The data show that the most substantial contribution came from the construction sector. As the INE highlighted: “Gross fixed capital formation (GFCF] under construction was the component that contributed most to the evolution of the total GFCF in 2017, of 9.2%, after having decreased by 0.3% in 2016.” This variation corresponded to a further 1.237 billion euros of investment compared to 2016. However, investment in construction has not yet returned to the values recorded prior to 2012.

Although it was not the fastest growing sector in percentage terms, construction is by far the largest, followed by other machinery and equipment and intellectual property products. The latter grew more marginally. In addition to construction, it was the investment in other machines and equipment (+968 million euros compared to 2016) and transport equipment (+318 million euros) that buoyed the historic increase in investment.

“GFCF in other machines and equipment accelerated significantly in 2017, going from a growth of 4.3% in 2016 to 13.0%,” the INE reported on Wednesday, adding that “GFCF in transportation equipment also accelerated in 2017, registering growth of 14.1% (8.4% in 2016).” Both categories have already made for the losses of the financial crisis.

Although it is not possible to discern how much of this investment is public from the INE’s data, according to data from the Directorate-General for the Budget, the Portuguese government invested 4.1 billion euros in 2017, about 13.3% of the total investment registered in the country last year.

Original Story: Economia Online – Tiago Varzim

Translation: Richard Turner