Stock and flow

• Prepared by Julien Le Roux This box examines the latest developments in the euro area stock of capital and its main drivers.
• More specifically, it discusses the role played by investment and the depreciation and retirement of fixed assets in explaining capital stock developments.
• The real capital stock growth is estimated to have decreased moderately in the wake of the COVID-19 crisis.
• This relative stability of the stock of capital hides the effects that the crisis may have on the value of the stock.
• The asymmetric sectoral nature of the pandemic shock may mean significant capital stock value losses at the sectoral level.
• [4] This valuation effect is not visible, at least in the short term, on the volume of the capital stock.

Chart A

Resilient capital stock growth so far Asset contributions to real capital stock growth (annual percentage change)
• The pandemic is hitting service activities more severely, while it affects the most capital-intensive sectors, like manufacturing, somewhat less heavily.
• Following the great financial crisis, the growth of the stock of capital gradually fell from an annual average of more than 1.5% before 2008 to around 0.4% in the period from 2011 to 2014 (Chart A).
• Currently, as in 2008 and 2011, capital growth in machinery and equipment has been severely affected by the COVID-19 crisis (Chart B).
• Conversely, investments in dwellings and other buildings and structures remain resilient so far to the same extent as in 2008 and 2011.
• [5] After three observable quarters of crisis, the deceleration in the stock of capital in IPP is stronger than was observed in 2008 and in 2011, but the starting point is also higher (Chart B).

Chart B

Total capital stock growth and the growth heterogeneity across assets Growth in real capital stock by asset (annual percentage change)
• [6] Gross fixed capital formation dropped in the euro area in the first half of 2020, adversely affecting capital stock.
• The initial data available, albeit tentative, suggest that lower depreciation rates supported capital stock developments.
• The COVID-19 shock negatively affected the capital stock in the euro area, mainly through lower investment.
• Despite supportive financing conditions, the high level of uncertainty adversely affects investment decisions, notably business investment.
• The pandemic has sharply curbed investment, whereas during the great financial crisis the decline was slower and less steep (Chart C, panel a).
• In 2020, in the largest euro area countries, changes in investment were of a magnitude comparable to value added (Chart C, panel b).

Chart C

The fall in euro area investment: a comparison with past recessions (x-axis: quarters; y-axis: percentage points)
• The lower depreciation rate partially offset the decline of investments implication for the capital stock.
• On the one hand, company liquidations may lead to some of the capital assets being retired before the end of their service life.
• It has also been argued that capital depreciation would be procyclical and linked to periods of higher maintenance of the capital in downturn periods.
• Moreover, the consumption of fixed capital, which does not, however, account for capital scrapping[9], has decelerated over 2020 (Chart D).
• Therefore, it looks as if, at least temporarily, the rate of depreciation has also supported the evolution of the capital stock.

Chart D

The fall in consumption of fixed capital: a comparison with past recessions Consumption of fixed capital per unit of value added in the largest euro area countries (x-axis: quarters; y-axis: percentage points)