In a world of wayward economic indicators, this one probably takes the cake. Investment was the party animal of our most recent growth cycle, keeping up with and feeding its excesses right up to the last call. What this left us with on the morn of the recession was a massive hangover of surplus capital – buildings and equipment to spare, all over the place. We tried to nurse our throbbing head by re-binging in the post-recession years, this time on public investment. It worked – but only briefly. We were soon back to the hard task of drying out. Are we through it yet?
Typically, the world would have long since returned to a state of investment normalcy. This time around, there are at five key factors that have significantly delayed the process. The first has already been mentioned: surplus capital at the end of the growth cycle. Why was it so huge this time around? Well, the cycle was actually a lot longer than usual, giving investors a shot of activity-boosting invincibility. At the same time, higher technology helped to export those excesses further across the globe than perhaps any other cycle; excesses weren’t limited to the developed world, but extended their reach into emerging markets. And higher commodity prices looped the resource sector in as well.
Delay can also be chalked up to the rush of public stimulus that came hard on the heels of the recession. It brought forward a lot of projects that would likely have been done over a longer period, and then when public funds dried up, there was a pull-back that would hardly have encouraged already-reticent business investment. Emerging markets had their own version of this, ultimately creating a third delay factor. Fear in certain key markets that investment would somehow fail to keep up with the economy’s eye-popping growth pace led to rates of growth in investment that were well into double-digit territory year after year. Slowing that momentum in tandem with a great recession proved difficult to do, and as such, behemoths like China are now trying to deal with surplus capacity.
A fourth source of delay is the resource sector. A pre-recession magnet for investment projects, it actually maintained its momentum after the recession, thanks to high commodity prices. The price plunge that began in mid-2014 revealed excesses in both energy and mining resource plays, and there has been a big unwind in the past few years.
Where is all this headed? Well, steadily over the last few years, spare capacity in the economy has been whittled down. Official capacity utilization rates are starting to get to the point where new investments are becoming a critical need. Even the resource sector, after two years of shakeout, is showing signs of renewed activity. That said, recent data on business investment spending has been disappointing. US investment in structures and equipment has averaged an annualized increase of just 0.3 per cent since the fourth quarter of 2014. Since that time, its share of GDP has dwindled as growth has been outpaced by other categories. The same is true for Canada, although as a share of GDP, investment is close to the post-recession trough. In both cases, energy investment is playing a role, moreso for Canada. But in both cases, key elements of non-resource investment remain slow. Why?
In addition to the factors mentioned above, psychology also plays a role. Let’s face it, business has been able to under-invest for a long time now. Perhaps long enough for even the seasoned to call it a new normal. Long enough that there are a lot of decision-makers in the system who have never known anything but this environment. And maybe long enough for enterprises to figure out innovative ways of limiting their outlays on capital. Layer onto that the policy uncertainty brought on by the Brexit referendum and the US election, and there’s further reason for the perpetuation of this pause. Logic suggests that tight capacity is the best cure, and that it’s imminent – but if so, there is a distinct lack of current signs.
The bottom line?
Economic growth tomorrow depends critically on the amount of investment spending in the works today. It’s a current catch-22, and it seems ensconced by its intransigence. Let’s hope that nascent optimism changes the picture.