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2015-08-06 09:16:10
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.