The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues.
- The global financial crisis caused a slump in business investment. In some countries, notably the US, investment has bounced back, but in parts of Europe there has been no recovery. In the UK investment dropped by 26% in 2008/09 and since then it has stagnated. Investment is continuing to shrink in southern Europe.
- Investment accounts for around 15-20% of GDP in the industrialised world, so weak capital spending has acted directly as a drag on growth. It has had another, more insidious and longer term effect. As the stock of plant and machinery, vehicles and computers becomes older and more worn out, productivity suffers and with, it, growth. Imagine, for instance, the effect on output and efficiency of relying on laptops and software bought on the day Lehman collapsed five years ago.
- It is no coincidence that the UK has experienced a prolonged squeeze on investment and has also suffered from poor productivity and GDP growth. Survey data produced by the CBI suggest that UK corporates do not have significant spare capacity, adding to the impression that the economy needs more investment.
- Today forecasters are united in believing that investment will be an important driver of the recovery in the big industrialised countries.
- In the UK the official independent forecasting body, the Office of Budget Responsibility, is forecasting a 32% rise in capital spending over the next 4 years. This amounts to a boom.
- The corporate sector collectively certainly has immense firepower at its disposal.
- Corporates in the US, euro area and UK are holding record or near record levels of cash. In the UK corporates have £488 billion in cash and cash equivalents on their balance sheets, an amount equivalent to 31% of UK GDP, and close to a record high (technical changes have caused the Office of National Statistics to revise down its estimate of corporate cash from over £700 billion. Nonetheless, the story remains one of high and rising corporate cash balances in the UK).
- Access and pricing of credit has also improved, especially for large companies. UK banks are reporting that for the first time in five years companies want to borrow in order to invest.
- The collapse in investment means that the UK is operating with equipment, machines and vehicles, which, in part, are pretty rundown. The returns to companies from investing are likely to be attractive after such a prolonged dearth of investment.
- Yet all of these positive factors are necessary, but not sufficient, conditions for investment. Our survey of Chief Financial Officers shows that two the key factors depressing corporate investment in the last year have been uncertainty and the weakness of Europe's economies. To get investment going we need to see changed perceptions in these areas too.
- Corporates have the means to invest. Our latest CFO Survey, which we will launch in next week's Monday Briefing, will shed light on whether corporates are preparing to invest.
MARKETS & NEWS
UK's FTSE 100 ended the week up 0.2%.
Here are some recent news stories that caught our eye as reflecting key economic themes:
- The US Federal Reserve surprised markets by announcing that it would not slow the pace of its $85bn-a-month asset-purchase programme
- The Bank for International Settlements warned of continued imbalances in the global economy and said that the popularity of high-risk investments represents "a phenomenon reminiscent of exuberance prior to the global financial crisis"
- The head of the Confederation of British Business said Bank of England's 'forward guidance' policy is working and that "Most entrepreneurs believe that interest rates are not going up in a hurry"
- The price of new homes in China rose at the fastest monthly rate in two-and-a-half years despite government efforts to prevent a property bubble
- The Bank of England warned that the property market "would become more of a concern if a period of rapid real house price increases appeared in prospect"
- Onion and vegetable prices in India rose to record levels as heavy monsoon rains damaged crops, with food price inflation a key cause of the Reserve Bank of India's surprise decision to raise interest rates
- European Central Bank President Mario Draghi said on Monday that the euro zone's economy remained "fragile" and reiterated that interest rates would stay at low levels
- The EU and Singapore finalised details of one of the world's largest free-trade agreements, potentially paving the way for a deal with other South East Asian nations
- The productivity of British workers in 2012 was 29% lower than in US and 24% lower than in Germany and France according to the UK Office for National Statistics
- The FT reported that hedge funds are turning to 'psychological software' programmes that aim to boost the performance of traders by analysing factors such as their mood, diet and fitness
- The auction for one of Brazil's largest oil discoveries drew only a quarter of bidders expected by the government, with little interest from western companies concerned by onerous state controls
- Google is exploring alternatives to cookies, the pieces of code that track online behaviour, in an effort to better profile customers across different platforms
- The FT reported that corporate and investment banks are seeking to save money by using shared infrastructure and services platforms
- Teenage birth rates in the US are at the lowest level since data was first collected 73 years ago due to increased usage of contraception
- Research house Key Note estimated that the British nursery industry is potentially worth £30bn, with the value of the market having grown 16.1% between 2007 and 2012
- US median household incomes remained lower in 2012 than they were in 1989, according to new census data
- Canadian billionaire John McCall MacBain gave £75m to Oxford University's century-old Rhodes scholarship programme
- Online fashion retailer Asos announced a 40% increase in sales in the year to end of August
- Microsoft raised quarterly dividends by 22% and renewed a $40 billion share buy-back in response to investors who have called for action to boost its share price
- Starbucks formally asked its customers not to bring guns into its cafés
- Estate agent Foxtons increased its value by more than £100m in just a few hours having made a stronger-than-expected debut on the London stock market
- Adidas issued a profit warning, citing weaker emerging market currencies as having a significant impact on profits
- A homeless man in Boston, America, who handed in a lost bag containing $42,000, has raised more than three times that amount via a crowdfunding website set up by a stranger who read about his story – honesty pays
- Sales of adult nappies will overtake sales of baby nappies in Japan by next year, according to Euromonitor, reflecting Japan's rapidly ageing population and the reluctance of its elderly citizens to be dependent on others – mature markets
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