A recovery in the global corporate capital expenditure (capex) cycle is some way off, according to a report published by Standard & Poors Ratings Services. Despite healthy corporate balance sheets, global capex spend fell by 1% in real terms in 2013.
Current estimates suggest a similar decline is likely in 2014 and early indications for 2015 are even more pessimistic. This 2014 estimate means global capex will be stuck at the US$3.3 trillion mark for the third year consecutive year, with no growth in sight.
"A recovery in capex remains one of the most keenly anticipated trends in the global economy", said Gareth Williams, corporate sector economist at Standard & Poors in London. "Our survey suggests the capex cycle remains stuck in neutral, with declining commodity and emerging market capex overshadowing a modest turnaround in developed markets.
There are plenty of reasons to assume an increase in capex should be on the horizon, not least ageing capital stocks and an improving global economy. There has also been an extraordinary build-up in cash held by the corporate sector, with the Global Capex 2000 now holding around US$4.5 trillion on their combined balance sheet. But despite this, companies in the most capex intensive sectors do not appear ready to spend more. Negative factors weigh including weak operating trends, declining profitability, falling bank lending and industry-specific pressures.
Emerging Market capex appears to be facing a serious case of indigestion, with capex spend falling 4% in 2013. This is expected to be repeated in 2014 and is affecting all BRIC companies. This is a significant reversal of a previously upward trend and has left global capex growth more reliant on slow-growing developed markets.
The significance of the pressure on energy and materials capex cannot be overstated given that these industries together accounted for 42% of global corporate capex in 2013. Aggressive cuts to capex are already being made by metals and mining companies. Of greater concern is the growing evidence of stalling capex in the much larger oil and gas sector. Other sectors will need to take the lead if we are to see capex recover and, encouragingly, we are expecting healthy capex growth from IT, healthcare and telecoms.
A contraction in energy and materials capex is likely to be a major drag on Asia-Pacific (ex-Japan) capex growth, offsetting the positive impact of a bounce back in IT and telecoms spending. Forecast revision growth rates have fallen back close to zero, the weakest trend seen since the onset of the financial crisis. Estimates point to a 3% real decline in capex in 2014 after a 2% drop last year. For now, the rising trend in the regions share of global capex has peaked.
Japans corporate capex is expected to see something of a bounce-back, rising by 2% in real terms in 2014 after a 4% fall last year. Forecast revision trends have also returned to positive territory. Japans share of global corporate capex has been gradually recovering since 2010.
Latin Americas capital expenditure has not recovered its former vigor since the financial crisis broke in 2008. Inflationary pressures have eroded real growth and currency weakness has shrunk the US Dollar value of spending. The slowdown in commodities is weighing heavily on the 2014 outlook, but better news is coming from telecoms.
Capex growth in North America has faltered since the heady, energy-led growth of 2011-12, although it is still expected to hold up better than in other regions, leading to a continued rise in North Americas share of global capex. But declining energy capex has made a significant negative contribution and the regions capex is expected to grow a meagre 1% in real terms, the same rate as 2013.
European capex growth has been modest but surprisingly resilient versus other regions over the last year, stabilizing the decline in the regions share of global capex. Expected cutbacks in spending from key companies imply a negative contribution from energy in 2014, but better news is coming from autos and telecoms. Even so, overall growth is likely to be a mere 1% in real terms in 2014.
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