Global capex continuing slide this year, S&P reports

Capital expenditure in real terms dropped by 1 per cent from the previous year. The level seen in emerging markets fell by 4 per cent. Current estimates suggest a similar decline is likely in 2014 and early indications for 2015 are even more pessimistic. The 2014 estimate means global capex will be stuck at the US$3.3-trillion (Bt106-trillion) mark for the third year consecutive year, with no growth in sight.

“A recovery in capex remains one of the most keenly anticipated trends in the global economy,” said Gareth Williams, corporate sector economist at Standard & Poor’s in London. “Our survey suggests the capex cycle remains stuck in neutral, with declining commodity and emerging-market capex overshadowing a modest turnaround in developed markets.”

There are plenty of reasons to assume an increase in capex should be on the horizon, not least ageing capital stocks and an improving global economy. There has also been an extraordinary build-up in cash held by the corporate sector, with the Global Capex 2000 now holding around $4.5 trillion on their combined balance sheet. But despite this, companies in the most capex-intensive sectors do not appear ready to spend more. Negative factors weigh including weak operating trends, declining profitability, falling bank lending and industry-specific pressures. 

The report showed that the decline in capex in emerging markets is expected to be repeated in 2014 and is affecting all BRIC companies (those in Brazil, Russia, India and China). This is a significant reversal of a previously upward trend and has left global capex growth more reliant on slow-growing developed markets. 

The significance of the pressure on energy and materials capex cannot be overstated given that these industries together accounted for 42 per cent of global corporate capex in 2013. 

Aggressive cuts to capex are already being made by metals and mining companies. 

Of greater concern is the growing evidence of stalling capex in the much larger oil and gas sector. Other sectors will need to take the lead if we are to see capex recover and, encouragingly, S&P expects healthy capex growth from information technology, healthcare and telecoms.

A contraction in energy and materials capex is likely to be a major drag on Asia-Pacific (ex-Japan) capex growth, offsetting the positive impact of a bounce-back in IT and telecoms spending. Forecast revision growth rates have fallen back close to zero, the weakest trend seen since the onset of the 2008 financial crisis. Estimates point to a 3-per-cent real decline in capex in 2014 after a 2-per-cent drop last year. For now, the rising trend in the region’s share of global capex has peaked.

Japan’s corporate capex is expected to see something of a bounce-back, rising by 2 per cent in real terms in 2014 after a 4-per-cent fall last year.