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Government investments affect economic growth, right?

27/03/2019

Erik Moniquet, Juliaan Catteeuw, Gertjan Werelds

Recently the European Central Bank communicated they would stick to the current monetary policy. The slow growth, the extraordinarily low interest rate and the continued quantitative easing make us question which instruments can be applied in case of a future economic shock.

In talks with a CFO the structural reform of the government arose. But what are the risks? How big is the share of government consumption in the demand side of the GDP? In 2017 it was 23% of total demand. The correlation with economic growth is rather limited. Investments have the strongest correlation with economic growth.

What is somewhat odd, is that government investments have a negative correlation with economic growth. This could mean that the government mostly invests when the economy performs poorly. It could also mean that high investments lead to slow growth. The relatively limited share of government investments in the total government expenses over the past six years suggest that this hasn’t boosted economic growth. In 2018, investments soared high above 2017’s levels. We wonder if this translates to a strong economic growth in 2019. If that is not the case, the key to dealing with a future crisis could be surprisingly simple.