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Is the global investment boom heading for a bust?

Aalmost no matter where You see, companies seem to be scaling back their ambitions. Facebook owner Meta recently said it would spend less in 2023 than it had previously promised. Disney slashed its capital spending plan for this year by a tenth, meaning less investment in its theme parks. Calavo Growers, a large producer of avocados and other fruits, intends to reduce its capital spending “as we navigate near-term uncertainty.”

These anecdotes are part of an unfortunate broader trend. A global survey of purchasing managers tracks new orders for investment goods, an indicator of capital spending. After surging in 2021, it now indicates demand is in line with the 2018-19 average. The U.S. capital spending “tracker” produced by Goldman Sachs offers a picture of business spending and hints at future intentions. Its current year-over-year growth is close to zero (see Figure 1). A global tracker produced by another bank, JPMorgan Chase, also showed a sharp deceleration. economist Analyzed data from 33 OECD nation. Capital spending in the fourth quarter of last year was down 1% from the previous quarter.

Investing is the most volatile component gross domestic product. When it soars, the economy as a whole tends to do the same.additional capital expenditure and r&d Increased productivity, higher incomes and living standards. It is hoped that the covid-19 pandemic will mark the start of a new “capex supercycle”. In response to the crisis, companies ramped up spending on everything: digitization, supply chains, and more. It took just 18 months for fixed investment in developed countries to return to its pre-pandemic peak, a fraction of the time it took after the 2007-09 global financial crisis. Companies of 2021 and 2022 Second&p US Large Business 500 spends $2.5 trillion, equivalent to 5% of the country gross domestic productcapital expenditure and r&dan increase of about one-fifth in real terms compared to 2018-19.

So the latest figures are sobering. What was perceived as the start of a structural trend may actually be a post-lockdown boom. Businesses are also revising down future capital spending investments. Our analysis of the plans of some 700 large US and European public companies suggests that real spending will fall by 1% by 2023. The market has taken notice of this change. In Europe, for example, shares of companies that typically do well when capital spending is high, such as semiconductor and chemical firms, surged in 2021 relative to the broader stock market, but have since retreated.

Why is the boom coming to an end? Three possible explanations are the most convincing. The first is that companies have less cash to burn than they did a few months ago. Companies in the developed world have amassed unusually high cash balances during the pandemic, partly because of government grants and loans. However, according to our calculations, the real value of these piles has declined by about $1 trillion since the end of 2021 (see Figure 2).

The second has to do with the state of the global economy. Supply chain disruption isn’t as bad as it was in 2021, which means there’s less need to invest in additional capacity or build inventory. In the fourth quarter of 2022, the number of venture capital deals in supply chain technology fell by about half year-on-year, according to data provider PitchBook. Inflation eats into consumers’ real incomes — businesses are less likely to invest in new products and services if they fear that no one will buy. Meanwhile, survey data suggested that higher interest rates also prompted rate cuts.

The third factor may be the most important. The capex boom is largely based on the assumption that the pandemic way of life will last forever, prompting an economic redistribution that will increasingly require new technologies. In many respects, however, the post-pandemic economy looks very similar to the pre-pandemic economy. As it turns out, there are limits to what people can consume on Netflix and use of Peloton. Spending on services has almost caught up with spending on goods.

There are exceptions — notably oil companies — that may increase capital spending this year, but those companies represent only a small portion of total spending. Companies leading capital spending are retreating. Semiconductor companies, in particular, have realized they overinvested in capacity and are now pulling back. In the last quarter of 2022, real US spending on information processing equipment fell 2% year-on-year. Forecasters believe Big Tech could cut capital spending by 7% in real terms in 2023.

In the U.S., the Inflation Reduction Act would provide huge incentives for green spending; this European Union is announcing its own subsidies. Russia’s war in Ukraine is encouraging Europeans to invest in alternative energy. To reduce their reliance on China and Taiwan, many companies are looking to break ground elsewhere. Over time, these various changes could cause investment to pick up again. But there’s no getting around the fact that the capex boom has faded.

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