Capital spending has fallen to a record low as a share of GDP. Today’s figures (pdf) show that in Q1 business investment in current prices accounted for 7.9% of GDP - its lowest proportion since records began.
OK, in part this is good news - it reflects the fact that the relative price of capital goods has fallen.
But this is only part of the story. The volume of capital spending, as a share of GDP, is now close to its lowest since the mid-90s.
This matters because capital spending is not only a cause of future GDP growth, but a symptom of it; one reason why firms don’t invest is that they don’t anticipate much future demand growth.
But why are firms not investing? Three reasons strike me as only a fraction of the story.
“The recession created spare capacity, and this means firms don’t need to invest.” No doubt, this is true for some firms. But if there were general spare capacity, inflation should be lower than it is, at least if you believe conventional output gap stories.
“Banks are starving firms of funds.” However, in recent years firms, in aggregate, have not even been investing their retained profits. If firms aren’t even spending internal funds, a lack of access to external ones is not the whole problem.
“Osborne’s fiscal squeeze is having conventional Keynesian effects.” Again, partly true, but investment was weak, especially in current prices, even before the recession.
I’d suggest two other possibilities.
One is that rebalancing is - so far at least - is having asymmetric effects. Companies serving consumers and government know that demand will shift away from them and so are cutting capital spending. But firms in export and investment sectors aren’t yet confident enough to invest. As a result, we’re seeing investment in service sectors fall by more than investment in manufacturing is rising.
Secondly, there is still - as Ben Bernanke said back in 2005 - a “death of domestic investment opportunities” in western economies. Quite why this should be so is not clear. Possible explanations include: a slowdown in the rate of technical progress; an inability to profit from what technical progress there is; and the migration of low wage-dependent business to the far east.
Two things, though, are clear. First, we know now that demand for investment good is price-inelastic. Lows prices of goods themselves, and low risk-free interest rates, are not enough to get firms spending.
Secondly, neither investors nor government nor the general public seem to be prepared for a world of few investment opportunities and weak growth.
* That spike in the chart is a statistical blip caused by a change in the way investment in the nuclear industry was measured.
I wonder what all these companies will do with their cash piles - there was an article on this, in the FT the other day:
http://www.ft.com/cms/s/0/3f85f56c-849a-11e0-afcb-00144feabdc0.html#axzz1NMClaOJK
(why don't you enable html in your comments?!)
if they either a) embark on acquisitions or b) start raising dividends or do share buy-backs, that's going to put cash into the hands of shareholders, on way or another. Then what are they going to do with it? Buy property?
[why doesn't somebody invest massively in solar power desalination plants combined with drip feed irrigation in Australia and elsewhere - those wheat prices are supposed to be sending signals]
Posted by: Luis Enrique | May 25, 2011 at 03:18 PM
"an inability to profit from what technical progress there is;"
I have a feeling in my water (no more, no proof or anything) that that's the one.
It also explains much of Tyler Cowen's argument about technological change. It's just not turning up in GDP etc.
But we can see technological change happening around us. Rapidly, so where's it all going?
Maybe....and it is entirely a maybe.....that change simply isn't being monetized in any manner. Say, this internet thing: we're getting ever more and cheaper music but we're eviscertaing the extant music industry at the same time and almost certainly GDP is delcining not increasing as a result. E books, Skype.....all minor in and of themselves but if technology is making things free (or hugely cheaper) then it could be accompanied by declining GDP (or at least rises not as fast as we might expet) plus an unwillingness of companies to invest.
GDP because we're measuring transactions in £ and investment because....well, some of these things just don't require much investment. Skype for example. 100 million users (say, imagine)....how much investment would a conventional telecoms comapny have to make to get that subscsriber network.
Probably the entire historical cost of the UK landline network?
Posted by: Tim Worstall | May 25, 2011 at 03:19 PM
Hey, looks like I agree with Bernanke and Worstall.
I'm afraid I can't add more than that, as a non-economist, but I thought it was obvious that developed countries like the UK lack the obvious and investment opportunities of India, China and so on.
Posted by: guthrie | May 25, 2011 at 07:53 PM
"Osborne’s fiscal squeeze"
What fiscal squeeze is that then? The one that has increased public expenditure by about 4% from 2009/10 to 2010/11? Or the one that has just registered a jump in public spending of 5% in April 2011 vs April 2010?
Posted by: Jim | May 25, 2011 at 09:32 PM
@Jim Sources please.
Posted by: aridtrax | May 26, 2011 at 12:19 AM
Public spending 2009/10: £669.26Bn (source: http://www.guardian.co.uk/news/datablog/2010/oct/18/government-spending-department-2009-10)
Public spending 2010/11: £694.4Bn (source: http://www.ukpublicspending.co.uk/uk_year2010_0.html)
Actually a 3.7% increase.
Recent figures for spending and borrowing in April 2011: http://www.bbc.co.uk/news/mobile/business-13519792
Fiscal squeeze?
Posted by: Jim | May 26, 2011 at 08:31 AM
OK, so if the government is spending more, why is it cutting money left, right and centre to all sorts of worthy causes, from universities to councils?
Posted by: guthrie | May 26, 2011 at 11:44 AM
The figs refer to 2010/11 spend. The cuts really bite from the 2011/12 financial year onwards (this was all in the emergency budget statement, PBR report and most recent budget). Yet they have front loaded most of the redundancy and transition costs to the exchequer to to 2010/11.
In other words - From April 1st 2011 - that's when the budgets get slashed.
Posted by: Glenn | May 26, 2011 at 11:49 AM
Tim
something relevant from Tyler Cowen on whether the benefits of the internest are 'in' GDP
http://marginalrevolution.com/marginalrevolution/2011/05/what-is-the-economic-value-of-the-internet.html
Posted by: Luis Enrique | May 26, 2011 at 12:32 PM
"one reason why firms don’t invest is that they don’t anticipate much future demand growth."
Firms' anticipating the demand reduction that is the consequence of an energy crunch? Peak oil etc?
Circularity here though is that with enough investment, an alternative energy infrastructure could be put in place that may support existing (or greater) levels of demand. However investment towards this may not be incentive compatible for an individual firm. Hence need for government action...
Posted by: dcomerf | May 26, 2011 at 02:24 PM
"Maybe....and it is entirely a maybe.....that change simply isn't being monetized in any manner."
Wow. Don't tell me the penny has finally dropped...
Posted by: Neil | May 27, 2011 at 12:06 AM
Really interesting perspective. Thanks!
Posted by: William | May 27, 2011 at 04:43 PM
Investment will not improve significantly until there are better economi cconditions.
Posted by: William | May 30, 2011 at 01:42 PM
"Secondly, there is still - as Ben Bernanke said back in 2005 - a "death of domestic investment opportunities" in western economies. Quite why this should be so is not clear."
This has been the case for thirty-odd years. Where have all the City bonuses gone? Into houses and land, not start-ups.
"Why this should be is not clear"? Let's just say Chris was really into widgets, and decided to invest this year's £10m bonus into a small widget manufacturing plant. Where's he likely to build it - here or overseas?
Posted by: Laban Tall | May 31, 2011 at 04:45 PM
Investment will have its ups and downs in the coming years as long as the financial and economic situation is not good enough to make business confident in taking risks.
Posted by: Tom | June 01, 2011 at 01:40 PM
How about this. Consumers and governments in the West are soaked in debt - actually encouraged by the out-of-control financial services sector and poor government regulation. This is a system created by Wall St and The City that makes a few people very rich by selling debt - so called assets - to the masses. Wages for most people have been kept down for years and there is no respite. Inflation is too high and increasing, meaning that consumers have less money to spend and service debt. Growth is in emerging markets, not the developed West; this imbalance is sucking resources away from the west. It is increasing inflation at a time when western consumers can't afford it. No growth = firms won't invest in capital goods or employ (unless they are migrant low wage workers). Don't need an over-paid economist to work that out!
Posted by: Jane Simpson | June 05, 2011 at 11:55 AM
Investment will not hit a steady and constant upward tendency as long as there are no incentives and economy is not going any better.
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