SLOWLY but surely, companies are starting to spend again, buying machines, computers and software and thus gradually beginning to rebalance the recovery. As a result, my worst fears – that the entirety of this recovery would be consumer-driven – haven’t so far materialised.
Fortunately, the nightmare that was 2012 – when consumer spending rose by £13.7bn, while GDP went up by just £4.2bn, implying lower net exports and investment – was just a one-off. Last year has turned out better, and with a bit of luck so will this year. An analysis of the data by Citigroup reveals that quarter on quarter growth in business investment has been faster than the increase in consumer spending for the last four quarters in a row. Business investment grew by an average of 2.1 per cent quarter on quarter last year, four times faster than consumer spending, the Citigroup numbers suggest.
Needless to say, that doesn’t mean that all of our problems are over. Consumer debt levels will soon start rising properly, and when that happens we could soon be in trouble yet again. Overall levels of business investment remain weak, and other forms of capex have lagged, including housebuilding, which should have exploded by now given the scarcity of supply. Britain’s external position remains weak: the UK needs to export more. But at least corporate investment is on the mend, and that is something worth celebrating. The one caveat is that all of the official statistics are about to be torn up – but at least this is what we know so far.
There is another crucial point. It is becoming much cheaper for firms to make the sorts of investments they need, especially in the services sector. A few years ago, a start-up had to spend lots of money on computers, servers, offices and various other essentials. Today, thanks to the cloud, ultra-cheap communications and new ways of renting cheap office space, all of these costs have declined dramatically.
This has reduced the barriers to entry for many entrepreneurial firms, but it also paints an unduly pessimistic picture of the actual amount of investment firms are undertaking – measured in terms of outcomes, rather than its cost.
The fact that the UK has become so services-oriented also means that companies will spend less as a share of GDP on capex – computers and IT can be very expensive, but usually less so than the sorts of tools and plants needed to conduct heavy duty manufacturing or oil and gas exploration. This is not a problem, merely a feature of our modern economy.
Simon Ward of Henderson is one of the few economists who has attempted to adjust for some of these trends. As he puts it, the price of capital goods – such as machines and other forms of equipment – has fallen steadily in recent decades, not least because of the IT revolution. Total national saving out of domestic income was 12.7 per cent of GDP in the fourth quarter, much less than the average of 16.0 per cent seen since 1985. One reason why saving is vital is to finance capital accumulation to allow supply-side growth and productivity improvements.
But the cost of capital goods has fallen, which means that fewer savings are required to deliver the same outcome than used to be the case – in other words, a given saving ratio would fund a higher real investment share of GDP. Ward’s alternative measure that adjusts for this relative price effect reveals that the real saving ratio is much closer to its long-run average.
I still think we should be saving more as a nation (and potentially investing the money abroad if returns are higher) to finance radically better retirement, social insurance and long-term care systems. But there is clearly some good news here. Companies are starting to invest more, and the spending is delivering more than it used to. There is still a long way to go, but some aspects of the UK economy are starting to look a little less unbalanced.