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News : Global Economy Last Updated: Jan 30, 2014 - 10:08 AM

Capex spending by global companies forecast to fall in 2014
By Michael Hennigan, Finfacts founder and editor
Jan 30, 2014 - 10:04 AM

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With the economic recovery seen as strengthening in the developed world this year, investors are hoping that the 2013 momentum in the stock markets would be sustained by companies spending some of their cash hoards on capex - - capital expenditure investments. However, capital spending by US companies is expected to grow this year at its slowest pace for four years, in a sign that the corporate sector has doubts about the outlook for global demand. Meanwhile, gross capital investment by the US public sector dropped to just 3.6% of US economic output last year, the lowest since 1947, compared with a postwar average of 5%. Last month Standard & Poor's said global capital expenditure is shrinking with the fading of the commodity cycle and European companies remain relatively constrained by weak cash flow. "Hopes for an investment-led recovery are misplaced in our view. Our latest analysis suggests that global capex expenditure will fall by 5% and that in Europe by 3% in in 2014 (real terms)."

A survey of non-financial companies in the S&P 500 index shows they are expected to boost capital expenditure by just 1.3% for the year ending in June, according to Factset, a data company. The Financial Times says that spending by companies in the S&P 1200 global index increased by 15% in 2011 and 11.3% in 2012, but it was unchanged in the first six months of 2013 compared to the equivalent period of the previous year, according to S&P Capital IQ, another data company.

Meanwhile, in the Bank of America Merrill Lynch survey for January, 58% of fund managers said they wanted companies to prioritise capital expenditure over other uses of cash flow, the highest number since the survey began in 2001 [see chart above].

According to Thomson Reuters data, big companies around the world held almost $7tn of cash and equivalents on their balance sheets at the end of 2013 - - more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years.

Reuters says many argue that the hoarding is driven by durable demographic trends and political reforms that are stirring corporate anxiety about exposure to soaring pension and healthcare costs as workforces age and government coffers shrink.

If that's true, then this brewing economic recovery may not release pent-up business cash on any scale close to that suggested by the eye-popping cashpiles.

S&P said in a report last month [pdf] that continuing slow growth in Europe appears to be structural rather than cyclical. The implication is that there is limited appetite or incentive for European corporates to innovate and invest in new technology and more efficient plant and equipment. The contrast with the  US is stark. In 2008 Europe’s share of global capex was 4% ahead of the US at 28%, but today Europe’s share has fallen  to 24%, as much as 10% behind the US (see Chart 8 in report).

"Our second concern relates to the lack of a coordinated public policy response within Europe to the challenge of cheap energy in the US.

The growing differential in energy costs in Europe relative to the US (see Chart 9) is starting to affect competitiveness of industry (see Chart 10) through various channels. High and rising electricity costs in Europe have a direct effect across most industries to varying degrees but petrochemical and related commodity industries face particular challenges as a result of cost differentials for (mostly ethylene derived) feedstock."

About a quarter of Japanese firms plan to hike capital spending in the next financial year, a Reuters poll shows, a sign of a cautiously positive sentiment towards a key engine for the nation's economic recovery.

Reuters says robust capital expenditure is seen as critical to Prime Minister Shinzo Abe's goal of sustainable economic growth and the survey comes after a surge in core machinery orders for November boosted hopes that such investment is decisively turning upwards.

The Reuters Japan Corporate survey, conducted Jan 6-20, also showed that 60% of firms plan to keep their business investment steady, which would follow an expected rebound in the country's capital expenditure for the current financial year.

While the poll did not point to a significant expansion, some of the 23% of respondents planning to boost investment, Abe's policies or "Abenomics" of bold fiscal and monetary stimulus have started to make their impact.

Reuters says the long stretch of declines in capital spending between fiscal 2008 and 2011 led to much factory equipment and software becoming out of date. Of the 263 firms responding to a question on what they would invest in, 59% said they plan to upgrade ageing equipment.

Finfacts: Huge corporate cash holdings of $2.8tn put recovery at risk; Top five own hoard of almost $400bn

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© Copyright 2011 by Finfacts.com

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