Big commitments are hard to make. Before putting substantial funding toward any business project, there has to be a solid case for it. At a very basic level, it helps when the economy is strong. When the political situation is stable. When there is good access to international demand. And, of course, when current facilities just aren’t sufficient to process current orders. The absence of these factors, or greater uncertainty shrouding them, has held back corporations the world over from making big commitments – for seven long years. More recently, on certain fronts the case has begun to improve. Is the sleeping giant starting to stir?
Before answering the question, some might doubt its premise. Giant? Gross investment in the economy? Add up its four big components – residential, non-residential, machinery and equipment and government investment – and you barely get 20 per cent of the economy. Certainly not the ‘giant’ status of consumer spending, at about 60 per cent of GDP, and international trade which, when both exports and imports are included, is also about 60 per cent of the economy. In aggregate, investment looks a lot more like a David than a Goliath.
Maybe so, but as the story goes, David proved to be the greater giant. Investment may be a bit of a sleeper in the economy, but don’t let its size fool you – it is actually the element that to a large extent determines the economy’s capacity to produce future goods and services. Take away its oomph, and it says a lot about where the economy is going. In the post-recession years, the oomph has clearly been absent. Globally, this investment cycle hasn’t been shorter in duration than most, but it has clearly been the least impressive in decades. Average growth has been almost a full percentage point below the next-to-worst growth period since 1980. In the OECD alone, make that since 1960. Through 2016, this giant has stayed pretty sleepy.
No less so than other elements of GDP, you might say. Sure, investment’s share of global GDP hasn’t really changed in recent years. Ah, but it has in the OECD, where the post-recession investment gap is as big now as it was in 2010. And what set emerging markets apart was massive government investment; the private sector is still dealing with a deficit.
Is there any reason to believe that the next few years will be any different? A recent Commentary suggested the first glimmers of a renewed investment cycle, in the machinery space. What about construction? Ask ‘new normal’ analysts, and they’d say there’s no hint of a change. The data seem to be on their side. But consider these factors: first, recent weakness followed the 18-month commodity price plunge that ended in early 2016. Since then, a partial revival has done the same for investment plans. As a whole, the worst seems over for the mining sector, and investments can again be considered.
A second factor is the industrial space. It was plagued by chronic over-capacity in the immediate post-recession years, but that has steadily been used up since. Now, OECD markets are looking at utilization rates that are as tight as they have been since 2008. Vacancy rates for industrial space in the US are in the low single digits in a number of cities, and in a number of cases are about as low as they ever get. Without some kind of uptick in investment, firms are soon going to have to turn away business, and jack up the prices of the limited amount of stuff they are making. Central banks see this, and in anticipation are tightening monetary conditions again.
A third factor is commercial office space. Demand for the services that these glass-and-steel structures produce is heating up, and vacancy rates seem to be getting a lot lower. While there is still room to grow, the effect of rising pressures on average rents is likely to get the sector more interested than it has been for some time in new projects.
The same trends are generally true for business investment in Canada. As things begin to heat up globally, demand is expected to be tighter in Canada’s export sector. Key manufacturers are already bumping into capacity issues.
The bottom line?
There’s little concrete evidence of a significant global upshift in investment. But there is a considerable increase in trusted preconditions. One final thought: political uncertainty has created a higher-than normal first-mover advantage.