WE all know that companies are hoarding cash. But contrary to the received wisdom on the matter, that doesn’t mean that they will start to spend the money as soon as their animal spirits recover. The cash is being stashed for a variety of reasons, many of them structural. There are ways of getting companies to spend more, of course, but there are good reasons to believe that elevated levels of cash piles are the new normal.
Official statistics reveal that UK non-financial corporate cash balances stood at £671bn on the most recently available figures, around 46 per cent of national income, substantially higher than the £240bn in 2002.
As an excellent note on the subject by Deloitte’s Ian Stewart points out, corporate cash balances in the Eurozone and America have also hit record levels, though remain lower as a share of GDP than in the UK. There are a number of reasons for this new love of cash.
Companies are worried about the future and are therefore holding on to more reserves in case the economy hits the rocks again and cash flow suddenly collapses; many cyclical businesses remain scarred by the near death experience of 2008 as well as by what is happening in the Eurozone. No wonder, therefore, that Deloitte research shows that cash surpluses at Italian and Spanish firms have risen far faster than those of their German counterparts: if you are a company in a riskier part of the world, you will hold more cash than if you are based in a relatively safe haven.
The opportunity cost of hanging on to cash has gone down, despite low rates: when adjusting for risk, many investments are now riskier than they were, and therefore cash has become relatively more attractive.
Many large firms have also decided that it is too risky to rely on banks. So they are cutting back on credit and self-financing. Even more radically, they are turning into mini-banks themselves: supply chain finance is seeing prosperous, cash-rich companies transfer surplus liquidity to their cash constrained suppliers.
But as Stewart points out, corporate cash holdings were already going up before the recession, for a variety of additional reasons. The rise of just-in-time production, the revolution in logistics and the relative decline of manufacturing (and rise of services) has reduced the need for traditional corporate working capital – stocks of as yet unsold goods. But many firms have chosen to maintain their overall amount of working capital, and have done so by replacing stocks with cash. This won’t change even if the economy recovers.
Another reason why even renewed confidence won’t lead to more spending in the UK is that a lot of the cash being hoarded here has been earmarked for more dynamic, higher return economies and will eventually be shipped off. As I have argued previously, the UK is being treated by some as a milch cow – with multinationals using cash generated in our stagnant, low return, declining economy to finance investments in dynamic, high growth markets – as well as a giant depository for money, with sterling holdings useful to many businesses seeking a diversified pool of liquidity. In 2012, 42 per cent of the capex undertaken by the 1,000 largest EU firms was made outside Europe.
The only way to combat this is radical supply-side reform to boost the returns on money invested in the UK. While cuts to corporation tax are a small, gradual shift in that direction, overall government policy has failed to make any substantial difference. Unless something changes, and fast, corporate spending won’t rescue the UK economy any time soon.
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