Even as global growth strengthens and with interest rates still at historically very low levels, capital investment will continue to stagnate and decline during the foreseeable future, according to a depressing report from Standard & Poor’s this morning.
Stronger growth, the enormous hoards of cash held by corporates worldwide (which more than doubled in the decade to 2013) seem incredibly favourable to a surge in capital investment - but the credit ratings agency is still voicing pessimism.
There are at least three big factors likely to cause the slump in capital expenditure:
The end of the commodity boom
It’s clear that energy and materials investment provided a large portion of the growth in the years running up to the crisis - more than half of the surge that nearly doubled capital spending between 2003 and 2008 was driven by the sector.
As a share of global private non-financial investment, energy took an increasingly important share - rising to make up nearly a third of spending last year from just a fifth in 2003.
This isn’t likely to continue, according to S&P - with declines of four, five and three per cent expected in this year and the next two respectively.
For countries like Australia, analysts have warned about this “capex cliff” - investment in sectors like mining has likely peaked and the scale and speed of any decline is now the major question.
Emerging market capes appears to be facing a case of serious indigestion Capex spending ell by four per cent in real terms in 2013 and looks set for a similar decline in 2014. The decline is broad-based and has affected corporates in Brazil, Russia, India and even China. This marks the first significant reversal in the long-term uptrend since the various emerging market crises of the 1990s
Amazingly, the emerging market share of non-financial investment, which doubled between 2003 and 2011, is now declining and likely to hold at about a quarter. Many European and American companies relied on emerging market investment, with low returns on investment in their own countries.
Corporates are are still negative on net about investment in emerging markets. What’s more, S&P think that the slippage isn’t down to a specific country or sector - it’s true of latin America, eastern Europe, the middle east and Africa, and Asia-Pacific (excluding Japan, which may well see investment growth this year).
Demand is still relatively weak
Even in the developed countries where investment looks to be picking up (including the UK), demand remains a very significant restriction on capital spending - according to the Confederation of British Industry (CBI), it’s the largest single limit.
The report doesn’t make for comfortable reading, and there are no solid proposals for exactly how it would be possible to avoid the stagnation. Happy Monday!