Don't rely on business investment to spur recovery
Capital expenditure across the world is expected to decline this year and next, according to a new report by rating agency Standard & Poor's (S&P), which warned that hopes of it driving an economic recovery were unfounded.
S&P said that despite a modest recovery in capital expenditure (capex) following the financial crisis, it slowed again in 2012, and is expected to contract by 2 percent in real terms this year. Initial forecasts for 2014 are for it to continue to slip, falling by 5 percent year-on-year.
"A modest post-crisis recovery appears to be stalling before it has really begun," S&P said in its annual survey, which looked at the 2,000 global companies which spend the most on capex (non-financial investment on physical assets like buildings and machinery).
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This downward trend is especially prevalent in Western Europe, which has seen its share of global capex fall to just 24 percent in 2012, down from a third in 2003, according to S&P. It is forecast to remain steady this year, before inching up to 25.4 percent in 2014, helped by increased investment by energy companies.
Part of the issue in Europe is that its companies often seek to invest outside of the region – for example, in the U.S. - in the hunt for firmer growth opportunities. S&P said that although this would be partially offset by investments in Europe made from elsewhere, "Europe's ongoing recession and weak growth prospects are clearly taking a toll on the corporate sector's willingness to invest."
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Emerging markets also looked fragile, S&P said, especially Latin America. The region is expected to experience the weakest growth in business investment of all regions in 2013, in part because of its heavy reliance on the energy, materials and utility sectors. As well as global macroeconomic problems, an additional reason for stalling capex growth is companies' dependence on these sectors, S&P said.
'Loss of Momentum'
Its report stressed that an end to the so-called "commodity supercycle" would prompt sharp cutbacks in the related industries, hitting capex levels.
On Wednesday, OPEC said that commodity price rises were slowing, due to stalling growth in emerging economies, in particular China. OPEC's report followed warnings from a number of analysts that the era of high commodity prices was coming to an end.
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"The loss of economic momentum – prompted by factors such as the euro crisis, fiscal austerity and the U.S. budget problems – is part of the story, but there are more structural concerns too," Gareth Williams, corporate economist at S&P, said.
"The energy and materials sectors' share of capex has risen dramatically over the last decade, so a fading commodity 'supercycle' will make it difficult for global capital expenditure to grow."
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North America, however, is one region S&P expects to increase its share of global corporate capex, from a low of 24 percent in 2009, to 35.6 percent this year and 36 percent in 2014.
"The U.S.'s decisive move out of recession had placed it relatively favorably versus other developed economies, uncertainties around fiscal policy notwithstanding," the report said.
"These capex trends suggest that this recovery has also boosted North America's relative investment position, something which may well bode well for its competitive position in coming years."
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However, S&P concluded that overall, there was little in its findings to suggest that corporate investment could, of itself, drive economic recovery.
"It has the potential to reinforce a well-established turnaround but, given the likely downturn in commodity-linked capex, an upturn in capex in other industries may be less beneficial for overall growth than generally assumed," the report said.
-- By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop