For an economy to prosper, companies must spend money on new plants and equipment – capital expenditures (or “capex” in economists’ jargon). Such investment is essential for prosperity.
When such spending is sluggish, bad times are upon us. When spending for capital investment quickens, good times are again prevalent.
Unfortunately, according to the latest statistics, such expenditures simply are not coming. An upsurge not only is failing to appear, but Standard and Poor’s predicts that declines in the current year are likely.
One of the aims of central banks’ efforts to keep interest rates low is to encourage more capex spending. Nevertheless, unfortunately now in emerging markets, those in the underdeveloped countries, capital spending is falling. Hitherto they were considered the engine of the world’s economy. However, capital spending as the share of the global capex spending fell from 34 per cent to 17% last year, according to current data.
Generally, the major investors have been the energy and mining companies; they accounted for nearly half of all capital spending in the past. Spending in 2013 fell, but further declines are likely to take place this year too.
Those sectors of the economy have been going through tough times, so capital spending by them has been falling. Up until recently capital spending has been exceeding companies’ cash flow, so a slowdown was inevitable. Then too, the investment boom in the previous decade meant that the supply of minerals has caught up with demand.
Given the very low interest rates, why have companies failed to devote resources to capital spending? The obvious answer is that corporations in those parts of the economy have not seen much growth in revenues. With that as a background, there is little reason to expect a revival in capex spending.
With that continuing weak spending on plant and equipment, the overall economy will remain sluggish at best. Historically, capex outlays have been a major boost to the economy. Hence as capital spending lags, the economy will not experience more growth.
What is needed, therefore, is removal of the deterrents to capital spending. Complex regulations handicap companies’ plan to spend. Also, heavy-handed labour measures certainly are negative factors.
Also, in Canada electricity rates, which hitherto encouraged industrial expansion, have become onerous. Cheap power was an important plus for industry, but that no longer is the situation; we must hope that governments will ensure less expensive power. That will help capital spending here.
Finally, as The Economist has explained, “Without a strong global recovery, companies will not spend more. But if they do not spend more, there will not be a strong recovery.”