Management | Corporate Cash

The partial revival seen recently in capital investment by companies reflects the mixed performance of the global economy and the outlook for it, as improved business confidence has led to more business spending in the US, while the waning of such “animal spirits,” as Keynes called market confidence, has dampened capital investment in other parts of the world.

In the US, where GDP growth has accelerated, annual growth in private nonresidential investment rose to 6.4% for the period ended June 2014, more than twice the level seen nine months earlier. And while the improvement is still short of the growth rates exhibited in late 2011 and early 2012, the most recent advances in corporate capex (capital expenditure—funds used to acquire or upgrade physical assets) contrasts sharply with the double-digit declines that characterized such spending during the depths of the Great Recession.

To be sure, the revival of capex in the US is occurring at a slower pace than in previous recoveries, as the IMF noted in its Global Stability Report in October. But with bank lending also picking up, the IMF added, the trend “could lead to further gains in capital investment and economic risk taking in the United States in the coming months.”

A quarterly survey of corporate treasurers by the Association for Financial Professionals provides more reason for optimism, at least in the US. It found a decline in companies’ cash holdings during the quarter ended September 30.

However, corporate spending has not seen much revival elsewhere. In the eurozone, private nonresidential investment advanced at an annual rate of less than 3% in the 12 months that ended last March, the most recent data available. And that was only the second quarterly advance since the period that ended in December 2011. Meanwhile, the IMF noted that companies are spending at levels considerably below their historical average, and that the trend is likely to continue, given the region’s poor macroeconomic conditions. “Capacity utilization is still below pre-crisis levels, bank lending standards have been tightening until recently, and economic policy uncertainty remains elevated relative to the pre-crisis period,” the stability report’s authors wrote.

Data for emerging markets is harder to come by, but the IMF noted that capex in several has fallen recently, and Standard & Poor’s recently forecast continued declines in business spending in the developing world.

In capex, as in GDP, the global economy appears to be running on one engine, a situation that IMF managing director Christine Lagarde suggested was unsustainable at the fund’s meeting in Washington, DC, in mid-January, where she called the global economy “lopsided.”