Public investment: catalyst for sustainable growth

Investment1 is an important instrument of economic growth. Apart from having a positive effect on aggregate demand, it enables future production growth. Through capital accumulation, investments directly impact a country’s potential GDP, i.e. the maximum sustainable level of output achievable by a country without creating inflationary pressure. Furthermore, new technologies can increase productivity and the utilization of factors of production. Potential GDP growth rate in the EU declined by half after the onset of the 2008 crisis: in the 2002-2008 period, average potential GDP growth rate in the EU was 2%, but dropped to 0.9%2 in the 2009-2016 period. This decline in growth is a consequence of, primarily, a significant reduction in total factor productivity and, secondarily, poor capital accumulation. The contribution of the labour factor has not been diminished to the same extent. Croatia has experienced more unfavourable trends than other EU member states, with the pre-crisis potential GDP average growth rate exceeding 3%, then declining or stagnating in the 2009-2014 period, and experiencing modest growth only in 2015. The primary factor contributing to post-crisis potential GDP growth slowdown was the capital factor, as its contribution in the post-crisis period was 2.5 times lower than when compared to the pre-crisis period, which was in line with investment trends in Croatia