Why Companies Are Hesitant to Invest, Even if Demand Is Soaring

Date: Wednesday, December 15, 2021
Source: The Wall Street Journal

Investment spending in the world’s largest economies has stalled, as supply-chain disruptions and uncertainty over the durability of the current economic boom hold back spending, a trend that could further exacerbate already high inflation.

Businesses around the world report shortages of goods that are in high demand, and consumer prices have risen sharply over recent months. While economists expect companies would have sunk money into expanding capacity, investment spending in many of the world’s largest economies has instead stalled.

Investment spending had by midyear bounced back from the sharp economic contraction seen in the early months of the pandemic, but there were widespread declines in the three months through September, the most recent period for which internationally comparable figures are available.

According to figures compiled by the OECD, investment spending fell in the U.S., Canada, Japan, Germany, South Korea, the Netherlands and Switzerland during the third quarter. Taking the Group of Seven largest rich economies together, investment spending fell by 0.8% from the second quarter. Moreover, national figures that aren’t adjusted for seasonal variations also point to a decline in China, the world’s factory powerhouse.

Investment spending in the U.S. has rebounded from its collapse in spring 2020 and now slightly exceeds pre-pandemic levels. But in the third quarter of this year it fell slightly.

That suggests businesses held back on investment just as shortages were contributing to a sharp rise in consumer prices, a sign that it will likely take many months to expand global factory capacity to match the pandemic surge in demand for goods.

A rapid rise in demand for consumer goods—from laptops to bikes to toys—has exceeded the global capacity to make such products, pushing up inflation and snarling supply chains that are straining to make and deliver them to shoppers.

While many economists expect demand for those goods to ease once it becomes safer to use services such as entertainment, travel and hospitality, they have also expected businesses to expand their capacity to make those products by boosting their investment spending.

The causes of the slowdown appear mixed. Many businesses cite price rises, supply-chain problems and uncertainty as to how long the surge in consumer spending will last. Strong demand for goods might persist if the changes in spending habits prompted by the pandemic endure—or it could prove transitory if consumers revert to their pre-pandemic behavior.

In China’s southeastern city of Wenzhou, Zhu Chaohu who leads an auto-parts company said he isn’t eager to invest in new factories or hire more workers, even though revenue has grown by about 25% so far this year from a year ago.

“We simply can’t tell how much longer the strong demand will last,” said Mr. Zhu, CEO of Zhejiang Tengxiang Auto Parts Ltd.

His company mainly sells ignition switches and has about 100 workers. Another reason behind the company’s cautious approach: elevated raw materials costs from copper to steel have squeezed its profit margin by more than 3 percentage points this year.

[Read from the original source.]