We’re fixated on current activity. What’s going on now in the market is a strong indicator in the health of the economy. It’s also what gives most players on the economic stage—businesses, consumers, policy-makers, to name a few—the best indication of where the economy is going. We may have our predictions, but the economy won’t achieve them unless it has the physical ability to do so. That’s where business investment comes in. The buildings and equipment that we put in place now are for the purpose of creating all the future goods and services that we’ll enjoy. That’s important—so, just how is business investment going?
In short, not so well. And the story stretches back more than a decade. Past commentaries have detailed the sub-par investment, which has characterized much of the developed world since the Great Recession of 2008-2009. What’s tragic is that in 2016, just as we were beginning to break out of that funk, populism crested and has since given rise to politicians who have appealed to the discontented. Many were elected on promises to set things straight. These, in turn, have put policies into place that have created significant uncertainty about the overall policy framework, which businesses will operate in for the foreseeable future.
Uncertainty about the structure of international interactions between economies is nothing new; the Great Recession itself had world leaders instantly questioning the merits of free and open trade. Some threatened to implement drastic protectionist measures, to the horror of their own globally-integrated multinationals. Thankfully, that initial foray gave way to a more co-operative approach to restoring global growth. However, sluggish growth caused global discontent to foment, increasing the appeal of anti-globalization rhetoric.
It takes a while for business to react. After all, much investment in buildings and equipment takes years of planning, and it can also take years to co-ordinate and put in place before any actual output is produced. Uncertainty first interrupts the plans; then, when the pipeline of existing projects is exhausted, the deceleration of actual spending sets in.
This is why the latest rounds of national accounts data from all over the world are so telling. Latest numbers show that in country after country, business investment has either been slow for a while, or has just recently stalled. For instance, consider the United States: total business investment declined in both the second and third quarters last year and likely did little better in the final three-month period. Spending on both structures and equipment suffered.
The U.S. is not alone. In the European Union-19 countries, business investment in structures collectively flatlined in the April-to-September period, while spending on machinery and equipment was up, then down. Of note, German investment was particularly hard-hit in the third quarter, and understandably the same was true for the United Kingdom. Japan bucked the trend, investing rapidly in equipment, but spending on structures stalled.
It would be revealing to know the investment impact on China, as a gauge of emerging market blowback. Unfortunately, official data don’t give a sense of this; however, if China’s Purchasing Managers’ Index is anything to go by, the mid-year dip in the index to the contraction zone might well indicate that business investment plans are in a similar tizzy. Anecdotally, several multinationals indicated they were moving key investments outside of China for fear of being locked out of the U.S. by tariff walls and other trade-impeding actions. These have yet to show up in the numbers, but the risk of losing key investment projects was clearly a concern to Chinese leaders who were already worried enough about the effects on China of global slowing.
This nascent loss of momentum is short-lived enough that if the causes of uncertainty are dealt with—or at least, if rhetoric and policy momentum shift significantly—we may see a quick rebound. But if the uncertainty persists, and is further stoked by negative developments, then this loss of momentum could become more severe.
The bottom line?
Global business investment is at a level crossing. It’s waiting for the train to show up, then move on so that it can proceed. If that doesn’t happen, it could trigger the next recession. If it does, the potential for near-term growth is significant.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.