Alongside the Autumn Statement last December, the Office of Budget Responsibility (OBR) published its Economic and Fiscal Outlook.
The report addresses the OBR’s persistent over-optimism in forecasting a strong uplift in business investment.
It notes that between Q1 2010 and Q2 2013, the weakness in its forecasts reflected:
weaker business investment than we expected, which is likely to reflect weak profitability, tight credit conditions and heightened uncertainty.
As noted in a post on business investment last week, uncertainty is fading and optimism is picking up.
Yet, credit conditions remain tight: net lending to manufacturing is down 40% since the recession ended and the 12month growth rate is -3.1%.
Weak profitability is the third of the OBR’s constraints on business investment (I’ll post on this later).
While the OBR identified three factors that held back investment over the past four years, there will be different factors spurring on the recovery in capex when it comes.
First, and perhaps most obvious, is growth itself. Capacity constrained firms in fast growing sectors will have pent-up demand for capex: future growth and profitability is in many ways dependent on today’s investment. (Again, more on growth capacity constraints in the aerospace sector next week!)
Second, investors are pressuring corporates to splash the cash. The problem with this pressure is that, as the FT reports, most of the cash is in the hands of the few:
Of the non-financial members of the S&P Global 1200 index, just 32 per cent of companies held 82 per cent of the aggregate cash pile, the highest level since at least 2000. With nearly $150bn in its coffers, Apple alone was sitting on about 5 per of the total at the end of its fiscal year.
Which means that not all corporates are cash rich. Look down supply chains and there’s simply not the cash sitting idle, waiting to be invested.