If they build it

WHEN companies spend money on new plant and equipment (capital expenditure or capex in the jargon), jobs and economic growth are the result. One of the aims of central banks’ efforts to suppress interest rates is to encourage more such spending. But the latest survey from Standard & Poor’s, a rating agency, indicates that a boom is yet to materialise: in real terms, capital expenditure fell 1% in 2013, and is expected to decline again this year.

Perhaps surprisingly, capex is falling in emerging markets, generally seen as the engine of the global economy. The emerging markets’ share of global capex fell from 34% in 2011 to 27% last year.

The big investors have traditionally been mining and energy firms, accounting for 42% of global capex in 2013. But spending in both industries has slowed sharply and is expected to fall this year. Companies may be losing the leeway to spend: capex has been higher than free cashflow in three of the last five years. In addition, the investment boom of the past decade may mean that the supply of minerals has caught up with demand.

Spending on research and development has been more robust than capex, rising 4.7% in real terms in both 2011 and 2012. But momentum appears to be slowing, despite an improving economy: R&D grew just 2.6% last year.

Why haven’t companies taken advantage of cheap finance and spent more? An obvious reason is that corporate revenue has not been growing very fast. Given that constraint, capex does not look so meagre. For global non-financial companies, the ratio of capex to revenues is close to its highest level in a decade. But that also means companies are unlikely to boost spending by much more. A survey of British firms suggests that uncertainty about demand and the risk of weak returns are the main deterrents for executives deciding whether to increase capex.

It seems like a chicken-and-egg problem. Without a strong global recovery, companies will not spend more. But if they do not spend more, there will not be a strong recovery.