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The global economy - What happened to the capex boom?

Jan 27th 2016, 13:57 by Buttonwood

ONE reason why interest rates were cut to zero in the aftermath of the

financial crisis was to encourage business to invest, and thus boost the real

economy. Companies have a "hurdle rate" for new investment; a project must

offer a higher return than the hurdle rate. Other things being equal (a

critical assumption), a lower financing cost should result in a lower hurdle

rate and thus that more projects get approved.

But as the graph from Citigroup shows, if one excludes energy and materials,

global capex has been flat since the crisis. And the boom in energy and

materals investment owes much to the lingering effect of the commodities boom,

which ended in 2011, and the development of shale oil and gas. Now that the oil

price has plunged, many energy investment projects have been cancelled.

So why hasn't other capex gone up? An obvious problem is the slow nature of the

global recovery. If companies do not expect rapid growth, then they will lower

the return forecast for any project they consider. Even though, the financing

cost has gone down, the number of potentially profitable projects may not have

increased.

Another issue may be that the new industries do not require as much capex as

before. It takes a lot of capital to build a steel mill; not so much to design

a video game or iPhone app. Perhaps, then, we shouldn't worry that capex is

flat. The worry, though, is that the new industries might not create as many

jobs either. A new report (also from Citi, but in collaboration with the Oxford

Martin school) says that the

downward trend in new job creation in technology industries is particularly

evident since the computer revolution of the 1980s. A study by Jeffrey Lin

suggests that, while about 8.2% of the US workforce shifted into new jobs

associated with the arrival of new technologies in the 1980s, the equivalent

figure for the 1990s was 4.4%. Using updates of official industry

classifications, Thor Berger and Carl Benedikt Frey further document that less

than 0.5% of the US workforce shifted into technology industries that emerged

in the 2000s, including digital industries such as online auctions, video/audio

streaming and web design

This analysis bolsters the "secular stagnation" argument. Emerging markets and

commodities gave world growth a lift for a while. Now that they have slowed,

where is the growth going to come from?