Companies globally ramping up spending on new plants, equipment after years of caution

Companies like Amazon are ramping up spending on new plants and equipment after years of caution.
Companies like Amazon are ramping up spending on new plants and equipment after years of caution.PHOTO: AFP

HONG KONG (BLOOMBERG) - A missing piece in the global growth jigsaw appears to be falling into place. Spurred by higher profits and buoyant stock markets, some of the world's best known companies from Amazon.com to Volkswagen are ramping up spending on new plants and equipment after years of caution. For an international economic expansion already gathering speed, that could prove a boon.

The thinking is that capital investment, or capex, will stoke not just demand, but ultimately higher wages and inflation. That's a positive for central banks and governments yearning to see profits trickle into workers' pockets. Employers have been reluctant to spend even amid an economic upswing spanning 75 per cent of the globe.

"Capex is definitely picking up," said Chetan Ahya, co-head of global economics at Morgan Stanley in Hong Kong. "This is a very important part of the global growth story."

A new tracker of business spending by economists at JPMorgan Chase & Co underpins such confidence. It points to capex growth running at a pace of around 8 per cent.

While the picture varies from country to country, there's enough evidence that spending is improving. US orders for business investment, for example, increased by more than expected in September and the economy's 3 per cent spurt of the third quarter was aided by a 1.5 per cent climb in business fixed investment.

"The pickup in business investment is like a fountain of youth for an ageing recovery," said Jim Paulsen, chief investment strategist at Leuthold Group. "US companies have an incredible amount of dry powder right now."

Amazon is spreading its international reach with operations in India, Australia and Latin America. It also has invited US states and local governments to submit proposals for a new headquarters that will cost US$5 billion (S$6.8 billion) and create 50,000 jobs over the next 15 to 17 years.

Caterpillar, the largest maker of construction and mining equipment, raised its sales and earnings forecasts, citing increased demand across markets. "We are seeing broad-based sales increases across a number of industries in all regions," chief executive officer James Umpleby said on a conference call.

It's not just the big names. The Pavilion analysts calculate capital spending by smaller US companies in the Russell 2000 index rose 33 per cent this year through Wednesday.

"Small business owners are definitely spending more on equipment," said Mark Vitner, senior economist at Wells Fargo Securities. "This marks a real change and partly reflects the improved regulatory environment, which is seeing less new regulation coming on line."

In Japan, core machinery orders, which are a leading indicator for future capex, rose in both July and August from a month earlier, after dropping in April through June. Auto giant Mitsubishi Motor plans to boost annual research expenses by 50 per cent to 133 billion yen (S$1.6 billion) in three years, while others including Toshiba and Toyota Motor are also spending.

In the euro area, a September survey of 600 companies by UBS found capex set to jump for the first time in two years. Volkswagen is investing 1.4 billion euros (S$2.22 billion) in new technology for commercial vehicles including electric drive trains and autonomous systems.

Meantime, China's industrial profits jumped the most since 2011, underscoring the resilience of the world's second-biggest economy. Electric vehicles are tipped to drive an investment surge.

Tesla is in talks with the Shanghai Government about setting up a factory, according to a Commerce Ministry spokesman. And China's plan to build a new silk road trading route, known as the Belt and Road Initiative, is expected to create more than US$1 trillion of investment on rail, highways and ports linking Europe and Asia.

For sure, rising capex won't solve all the world economy's challenges. Along with weak productivity and low inflation, worries include geopolitical risks and simmering trade tensions. The International Monetary Fund this month lifted its 2017 global growth forecast to 3.6 per cent but cautioned the recovery is far from complete.

Still, Tim Graf, head of EMEA macro strategy at State Street, predicts companies will be jolted into action by the pending removal of monetary stimulus across the world.

"The impetus will be to improve investment spending, simply because the cost of financing is likely, at the margin, to go up," Graf told Bloomberg Television. "We're exiting the era of ultra-low policy rates, ultra-low long-term real interest rates and what tends to typically happen is companies try to get ahead of that."