Chart of the month - US and UK fixed investment revived in Q1
A brief summary
- The UK and the US saw a strong pick-up in fixed investment in Q1 2017 after more than two years of subdued spending
- The Bank of England Agents’ survey pointed to increased investment intention in Q1 2017 amid resilient credit availability to corporates
- US fixed investment rose at the fastest pace in five years in Q1 2017 and was consistent with the surge in corporate confidence post-election
Both UK and US GDP growth slowed in the first quarter (Q1) of 2017, undermined by slower growth in household consumption as higher inflation eroded spending power. On the positive side, both economies saw a strong pickup in fixed investment (investment in physical assets such as machinery, land, buildings, vehicles and technology) after more than two years of subdued spending. In the UK, fixed investment picked up +1.2% in Q1, the strongest pace in nearly two years. Reflecting this, business investment saw its first positive year-on-year growth since Q4 2015. In the US, fixed investment expanded at +2.9% in Q1, the fastest pace in five years. The revival in the investment cycle is crucial to longer-term trends in productivity, wage and GDP growth. So, what were the drivers behind the revival in corporate spending as the year began and are they sustainable?
In the UK, the pick up in business investment was due to the increase in other machinery and equipment, and intellectual property products, particularly software data. The Bank of England Agents’ summary of business conditions stated that investment intentions increased in Q1, reflecting stronger demand and an easing in uncertainty over shorter-term projects due to better than expected economic activity. It was revealed that firms had been going ahead with strategies designed to mitigate increased labour and material costs, while the rising shift to e-commerce encouraged investment in digital marketing, online capacity and logistics. The development was in line with our view that businesses will invest more to deal with challenges relating to Brexit and rising recruitment difficulty. Another important factor to consider when looking at business investment is the availability of credit. So far, credit conditions for non-financial corporates have remained good and the latest Bank of England Credit Conditions Survey reported resilient credit availability, this is likely to remain supportive to business investment.
In the US, the surge in fixed investment was led by structures, due to the surge in oil rig counts and mining-related activity as a result of the recovery in oil prices. Residential, equipment and intellectual property investment also contributed positively. This was consistent with the surge in corporate confidence, as reflected by the National Federation of Independent Businesses (NFIB) survey. The US NFIB Index soared during the post-election period and has subsequently remained elevated despite rising doubts about President Trump’s delivery of pro-growth policies. Also, the pick-up in fixed investment suggested the gradual rise in interest rates has not been a hindrance to capital spending. On the contrary, we believe the prolonged period of ultra-low interest rates has reduced the incentive for corporates to take risks, and that the normalisation in monetary policy will be a catalyst to revive much-needed animal spirits. Looking ahead, two things that may restrain the growth in US capital spending are the marked slowdown in credit to non-financial corporates and the impending taper of the Fed’s balance sheet later in the year. On the positive side, strong US corporate cash holdings and potential business-friendly policies will be supportive.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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