Investment marks end to 'lost decade'

The improved outlook for expenditure could open the way for higher interest rates and a return to normality. Photo / 123RF

By Tim Wallace

Business investment is picking up at last after "a lost decade" across the globe, raising hopes that the rise in economic growth could be sustained.

Capital expenditure by businesses worldwide is set to rise by 6 per cent this year, analysts at Standard and Poor's believe, after falling by 7 per cent in 2016 and 10 per cent in 2015.

"The improved outlook for capex is important economically, as it will help make recoveries more sustainable, but also for the longer-term growth prospects of the corporate sector which has seen a lost decade of capital spending," said S&P's Gareth Williams, adding it could open the way for higher interest rates and a return to normality.

"Greater capital spending not only signifies growing confidence in the durability of this recovery but, by helping lessen reliance on an extraordinary degree of monetary stimulus, also helps to make the improvement more sustainable in the medium term and less vulnerable to the gradual withdrawal of ultra-cheap money."

The poor investment performance across the world in recent years has disappointed economists, as ultra-low interest rates would be expected to boost spending.

S&P noted investment had fallen for the past four years and barely risen overall since the financial crisis, as capital investment of US$2.6 trillion ($3.5t) in 2016 is the lowest figure since the US$2.4t recorded in 2006.

Every part of the world should join in the improvement in investment, led by Japan with growth of 11 per cent, then western Europe at 10 per cent and Latin America next at just above 8 per cent.

Most sectors will benefit, too. Investment in software will grow by close to 20 per cent, followed by technology hardware and the retail sector.

Car companies will increase investment by 15 per cent, with media firms and consumer durables businesses also near the top of the table.

Telecoms investment will shrink by 5 per cent, the S&P study predicts, with consumer and professional services industries also cutting back.

Britain is likely to play a full part in the rise in investment, despite worries that business confidence has been dented by political turmoil.

"For UK-domiciled companies within our dataset, there is no obvious sign yet that capex intentions have been hampered by Brexit. Capex spending by UK companies in our universe is expected to grow 5 per cent this year," S&P said.

"This is half the growth rate expected for western Europe as a whole (+10 per cent) but partly reflects the UK's relatively high weighting of energy and mining companies."

When currency shifts such as the pound's slump are excluded and those volatile sectors are accounted for, the difference largely disappears.

Foreign investment into Britain is also performing well.

"Preliminary data for 2016 flows ... suggested that the UK was the second-largest global recipient of foreign direct investment in 2016. For the moment at least we have no evidence of any adverse impact on FDI."