The current level of business investment is not unusually low, with firms opting to use funds to pay dividends or buy back equity instead. Nevertheless, that doesn’t mean the outlook for business investment is encouraging. With the stronger dollar hitting manufacturers and the slump in energy prices devastating the mining sector, the growth rate of equipment investment will remain muted next year. An additional constraint is that corporate profits will come under more pressure as wage growth inevitably begins to accelerate. Finally, the 100 basis point jump in corporate bond yields will make it more expensive for firms to raise external financing for investment projects. All things considered, we expect business investment to increase by a modest 3.2% next year.
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