There is mounting evidence to suggest that business investment growth is set to rebound, which should help drive overall GDP growth back above its potential pace in the second half of this year.
- There is mounting evidence to suggest that business investment growth is set to rebound, which should help drive overall GDP growth back above its potential pace in the second half of this year.
- Looking at the latest hard data, the downturn in business investment has shown few signs of abating. The continued stagnation in capital goods orders and shipments suggests that, after contracting in both the first and third quarters of last year, equipment investment declined again in the fourth quarter.
- That said, the continued loosening in financial conditions and the easing of trade policy uncertainty suggest that a rebound in investment may not be far off. Borrowing costs for both investment-grade and high-yield firms have fallen dramatically since the start of 2019. A similarly-sharp resurgence in equipment investment is unlikely, but this should at least provide some support over the months ahead. (See Chart 1.)
- Meanwhile, although it’s hard to quantify, the gap that opened up last year between investment and corporate profits suggests that tariff uncertainty has caused firms to delay capex plans. (See Chart 2.) With the USMCA deal signed and the threat of further tariffs on Chinese goods seemingly off the table, that drag should now be fading. Investment in the manufacturing sector, which still accounts for a disproportionate share of the total, will receive an additional boost from the recent stabilisation in global activity growth.
- This has already contributed to an improvement in the survey evidence. Admittedly, the Conference Board’s survey suggests that while CEO confidence picked up in the fourth quarter, it remained unusually weak. (See Chart 3.) But the NFIB’s measure of small business capex intentions has staged a much clearer recovery in recent months, consistent with equipment investment starting to rebound. (See Chart 4.) The capex intentions indices of the regional manufacturing surveys have also shown signs of improvement.
- With the rally in oil prices suggesting that mining investment is also set to rebound, and intellectual property investment expanding at a solid pace, this all points to a gradual recovery in business investment growth over the first half of this year. That in turn would make it more likely that the recent upturn in productivity growth will be sustained, thereby prolonging the economic expansion.
Chart 1: Corporate Bond Yields & Bus. Equip. Invest.
Chart 2: Corp. Profits & Bus. Investment (%q/q Ann.)
Chart 3: CEO Confidence & Bus. Equip. Invest.
Chart 4: NFIB Capex Intentions & Bus. Equip Invest.
Andrew Hunter, Senior US Economist, +44 20 7808 4071, email@example.com