Just when the consumer may be faltering, the news on the investment front could not be less promising. Steven Roach reckons that continuing fear of deflationary pressures is keeping many corporate wallets tight shut.
Deflation may well be a monetary phenomenon, but it also reflects an inherent imbalance between aggregate supply and demand in the real economy. And business capital spending is what drives the supply side of this equation. Lacking in pricing leverage and fearing the globalization of an Asian-style deflation, companies should be biased against making incremental additions to capacity. With a post-bubble world still awash in excess supply of goods and services, a sudden burst of capital formation would only add to the overhang. Over the past several months, I have had conversations with executives from a broad cross-section of America’s leading companies. I can assure you they get it. They are virtually unanimous -- with the exception of a few energy businesses -- in expressing the view that caution on capital spending goes hand in hand with a lack of pricing leverage. These executives don’t forget for a moment how badly they were burned by the open-ended capex surge in the late 1990s. Until the supply-demand balance turns more favorable, the businesspeople I have spoken with tell me this post-bubble caution is unlikely to fade -- irrespective of war-related gyrations in the US economy. The only capacity expansion programs they are contemplating are in low-cost outsourcing platforms such as China.
Source: Morgan Stanley Global Economic Forum
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