Capital expenditures around the world have been disappointing.
When companies spend money on new plant and equipment (called capital expenditure, or capex in the jargon), jobs and economic growth are the result. One of the aims of central banks’ efforts to suppress interest rates is to encourage more such spending.
But the latest survey from Standard & Poor’s indicates that a boom is yet to materialize: in real terms, capital expenditure fell 1 percent in 2013, and is expected to decline again this year.
Perhaps surprisingly, capex is falling in emerging markets, generally seen as the engine of the global economy. The emerging markets’ share of global capex fell from 34 percent in 2011 to 27 percent last year.
The big investors have traditionally been mining and energy firms, accounting for 42 percent of global capex in 2013. But spending in both industries has slowed sharply and is expected to fall this year.
Companies may be losing the leeway to spend: capex has been higher than free cash flow in three of the last five years. In addition, the investment boom of the past decade may mean that the supply of minerals has caught up with demand.
Spending on research and development has been more robust than capex, rising 4.7 percent in real terms in both 2011 and 2012. But momentum appears to be slowing, despite an improving economy: R&D grew just 2.6 percent last year.
Why haven’t companies taken advantage of cheap finance and spent more? An obvious reason is that global corporate revenue has not been growing very fast. Given that constraint, capex doesn’t look so meager.
For global nonfinancial companies, the ratio of capex to revenues is close to its highest level in a decade. But that also means companies are unlikely to boost spending by much more. Why? A survey of British firms finds uncertainty about demand and the risk of weak returns.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.