MOST of the commentary on the
But it is much less variable than companies' spending on new equipment, buildings and inventories, which in total is equivalent to a quarter of the amount of consumer spending. It is companies that are the main drivers of the business cycle, the expansions and recessions which we observe in the Western economies.
So, for example, GDP in the Eurozone reached a peak in the first quarter of 2008. It stopped falling in the third quarter of 2009, and has grown slightly since then to the most recent date for which complete data is available, the third quarter of 2013 (although flash figures for the fourth quarter were released this month). In real terms, total output is still some 3 per cent below its 2008 peak. But in each of the three quarters just mentioned, the peak, the trough and the latest period in the recovery, the level of consumer spending in the Eurozone was virtually the same. In contrast, corporate investment fell by 19 per cent during the recession. A key reason why the Eurozone as a whole has not recovered fully is that corporate investment continued to fall, albeit at a much slower rate, to the third quarter of 2013.
Keynes recognised that economic fundamentals like profits and interest rates influence firms' investment decisions. But he overlaid this with psychology. The same set of fundamentals are capable of more than one interpretation - more than one narrative can be constructed about them. It is this psychological factor which is the key. The Bank of
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