AAbout wherever wherever You see, companies seem to be toning down their ambitions. Facebook owner Meta recently said it would invest less in 2023 than previously promised. Disney is slashing its capex plans for this year by a tenth, which means punitive investments in its theme parks. Calavo Growers, a large producer of avocados and other fruits, intends to reduce its capital expenditures “while we navigate near-term uncertainties”.
The anecdotes are part of an unfortunate wider trend. A global survey of purchasing managers tracks new orders for investment goods, a proxy for capital expenditures. After a bounce in 2021, it now points to demand in line with the 2018-19 average. A US capex “tracker” produced by Goldman Sachs, a bank, paints a picture of businesses’ outlays, as well as hints at future intentions. It is currently registering near zero growth, year on year (see Chart 1). A global tracker produced by JPMorgan Chase, another bank, also points to a sharp slowdown. economist analyzed capital expenditure data from 33 oecd countries. Capital spending in the fourth quarter of last year fell 1% from the prior quarter.
Investment is the most volatile component Gross Domestic Product, When it rises, so does the economy as a whole. additional capex and RAndD Increases productivity, raises income and standard of living. There were expectations that the COVID-19 pandemic would mark the start of a new “capex supercycle”. In response to the crisis, firms increased spending on everything: digitization, supply chain and more. It took just 18 months for rich-world fixed investment to reach its pre-pandemic peak, a fraction of the time it took after the 2007–09 global financial crisis. in firms in 2021 and 2022 SAndP The 500 index of large US firms spent $2.5 trillion, equivalent to 5% of the country Gross Domestic Producton capex and RAndDAn increase of about one-fifth in real terms as compared to 2018-19.
In such a situation, the latest figures are shocking. What people thought was the start of a structural trend may actually be the end of the lockdown euphoria. Businesses are also revising future capex investments. Our analysis of the plans of nearly 700 large, listed US and European firms suggests that real spending will fall by 1% in 2023. The market has caught on to this change. For example, in Europe, share prices of companies that typically do well when capital spending is high – such as semiconductor and chemical companies – rose relative to the broader stockmarket in 2021, but have since fallen back.
Why is the boom ending? Three possible explanations are the most plausible. The first is that companies have less cash to spend than they did a few months ago. Wealthy firms around the world accumulated exceptionally high cash balances during the pandemic due to grants and loans from governments. However, according to our calculations, the piles have declined by almost $1trn in real terms since the end of 2021 (see Chart 2).
The second relates to global economic conditions. Supply-chain disruptions are not as bad as in 2021, which means there is less need to invest in additional capacity or stock up on inventory. Figures from data provider PitchBook show that the number of venture-capital deals in supply-chain technology in the fourth quarter of 2022 nearly halved from the previous year. Inflation has eaten into consumers’ real incomes – and businesses are less likely to invest in new products and services if they worry that no one will buy them. Meanwhile, survey data suggests that higher interest rates are also indicating a cut.
The third factor may be the most important. The capex boom was largely based on the assumption that the post-pandemic lifestyle would last forever, leading to economic redistribution that would require a vast number of new technologies. However, in many ways, the post-pandemic economy looks remarkably similar to the pre-pandemic one. It turns out that there is a limit to people’s Netflix consumption and Peloton usage. Expenditure on services has become equal to expenditure on goods.
There are exceptions – not least oil companies – that are likely to boost capex this year, but these companies account for only a small portion of total spending. Companies that have been leading the capex charge are pulling back. Semiconductor firms, in particular, have realized that they have massively overinvested in capacity, and are now pulling back. US real spending on information-processing equipment is set to decline 2% year over year in the final quarter of 2022. Forecasters believe large tech firms are likely to cut capex by 7% in real terms in 2023.
In the US, the Inflation Reduction Act will provide a big boost to green spending; European Union Unveiling its own subsidy. Russia’s war in Ukraine is encouraging Europeans to invest in alternative sources of energy. And in an effort to rely less on China and Taiwan, many firms are looking to land factories elsewhere. Over time, these various changes may cause investment to increase once again. But it cannot be denied that the capex boom is over.
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