Critical need for investment

Everywhere you look, business seems spooked. It’s nothing new: times were better than ever, and arguably for longer than ever, when the Great Recession devastated businesses the planet over. Promises of generous government programs nursed those fears, but only temporarily. Year after year of sluggish growth lulled business into a sense that this was a new reality, and that contrary to prior experience, a new business expansion wasn’t going to be needed. This was the cycle where slow and steady would win the race. Turtle investment is where it’s at.

Do the numbers agree? Statistics for OECD nations are sobering. In the US, average annual growth of non-residential investment was almost 7 per cent in the past three investment cycles. Post-2011, it was just 4.6 per cent. Europe had a similar experience. Pre-recession growth averaged just under 4 per cent annually. From 2009-2018, the average dipped to 1.9 per cent. Japan is in a protracted funk, averaging 3 per cent. The data suggest there’s an issue.

Perplexed by business intransigence, political leaders demanded at points in the post-recession period that the corporate world do its part. The shaming campaign didn’t really work; after all, in a capitalist system, nobody can or should tell business what to do, because it knows best. Or at least, it’s supposed to. So, why didn’t business pick up the pace this time around?

Well, what is the spark that gets investment going after a recession? Typically, businesses realize that the recession happened because they – and the whole economy with them – were overdoing it. Too much consumption led to too much investment, which produced too many jobs that in turn sparked wage inflation, boosting consumption, then investment, and so on. It’s a self-reinforcing mechanism that creates a bubble, and recession is simply the bursting of the bubble. Business then retrenches, uses up the spare capacity they are left with, and the investment cycle resumes. In a typical recession, business investment is down for a year, maybe two before looming capacity constraints spark the new round of investment. Slower businesses then see other businesses ramping up, and they follow suit. Growth during this phase is usually quite dramatic.

Trouble is, this time around, the actors didn’t show up. Why’s that? Three key reasons: First, the pre-recession investment bubble was so huge that it has taken years for the reset to occur. Second, the delay has had a psychological effect; business wonders if that magic moment is ever going to occur. Third, while business is trying to decide, the global wave of neo-protectionism is scaring them away from any kind of long-term commitment. Some are openly wondering if we will even see recovery-style investment before the next recession hits.

Meanwhile, higher growth is putting demands on existing capital. In the US, overall industrial capacity utilization is dangerously close to the pre-recession peak level, normally enough of a signal to get investing. Instead, business seems content to squeeze as much as possible from existing plant and equipment. Data show that the average age of private fixed assets in the US is at a modern-day high of almost 23 years, following a dramatic post-2008 surge.

It could be we are witnessing history. The economy has served up a long list of post-recession reasons for the corporate world to hold back. They’ve done it for long enough that a growing number of decision-makers has never seen a proper cyclical upshift. And the longer this lasts, the less likely we’ll actually see one. It may be the first time in modern memory that expansion is actually held back by the lack of capacity to produce the goods and services that consumers everywhere are demanding. Logic suggests that the price mechanism is supposed to solve that problem, but thus far, it has proved impotent. The waiting game is starting to time out on us.

If the Great Recession is a fading memory, its effects are definitely not. Ten years beyond that event, certain parts of the economy have yet to recover. Business investment is one of them, and the longer time goes by, the less likely we’ll actually see recovery. If so, the opportunity cost would be opportunity lost.