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Aug 4th 2015, 10:13 by Buttonwood
ONE of the justifications for low interest rates and quantitative easing is
that reduced borrowing costs will encourage companies to invest more money
building plant, buying equipment and hiring new workers. But the record has
been pretty disappointing. A survey by Standard & Poor's (S&P) funds that
global capital expenditure by non-financial companies is likely to decline in
2015 for the third year in succession, even though the corporate sector has an
estimated $4.4 trillion on its balance sheet, earning very little.
Admittedly, the problem this year is focused on one particular sector energy
and materials. Falling commodity prices have led to big cutbacks; S&P estimates
the decline will be 14% this year. If you exclude commodities, the rest of
industry will grow capex by 8%. But that is only of limited comfort. The
commodity sectors were helping to keep global capex propped up they accounted
for 39% of the total in 2014.
S&P is dubious of the view, taken by Andrew Smithers and others, that the cash
has been diverted to share buy-backs; this is a largely American phenomenon. In
2014, North America was the only region delivering capex growth. This year, it
is the only region expected to report a decline and that is because of the
energy sector.
There is still a mystery to explain, however. Corporate profits in America are
close to a post-war high as a proportion of GDP. With interest rates low, it
would seem to be a no-brainer to invest more and take advantage of such high
returns. S&P suggests a cyclical and a structural reason why this isn't
happening. The cyclical reason is that growth has been sluggish by the standard
of past recoveries; emerging market growth now looks weak. Capex growth seems
to track revenue growth and that has been falling. It is not an enticing time
to invest. Secondly, the companies that have cash are concentrated in the tech
industry, which has less need for capex. Indeed, the economy has moved away
from a dependency on heavy industry, where continual capex was vital.
While S&P sees some signs of confidence in the broader corporate world, the
commodity sector is likely to make further cuts in 2016. If you are waiting for
capex to revive the global economy, you may be waiting a while.