Business Investment Hesitant Despite Soaring Demand
Supply chain troubles, surging costs and the uncertainty of future demand keep investors commitment-shy, according to The Wall Street Journal (subscription).
The big picture: Businesses report record supply shortages, leading to sharp inclines in prices worldwide. Investment spending in many of the world’s largest economies is stagnant despite economists’ expectations that production capacity will expand to meet the rising pandemic demand for consumer goods, from laptops to bikes. On the one hand, the hills in demand are causing valleys in supply. On the other hand, though they are facing valleys in supply, businesses are restraining investment, thereby contributing to hills in supply and inflation.
International decline: Investment spending tumbled in the U.S., Canada, Japan, Germany, South Korea, the Netherlands and Switzerland during the third quarter. In Group of 7 countries, which together make up the richest economies in the world, investment spending fell 0.8% in the second quarter; China, the world’s factory powerhouse, also experienced a decline. U.S. investment spending bounced back from spring 2020, though only slightly exceeds pre-pandemic levels, falling marginally in the third quarter. In the Eurozone, consumer spending rose 4.1% leading up to September, but investment expenditures declined 0.9%.
Investment interrupted: Businesses cite price increases, supply chain issues and long-term uncertainty. Demand can be sustained so long as pandemic spending habits prevail; however, consumers may revert to pre-pandemic trends. The spike in costs for raw materials, from copper to steel, are also squeezing profits. While expanding capacity is necessary to keep up with demand, should it persist, many businesses are opting to add capacity passively by temporarily padding their workforce rather than investing in new factories.
Operating costs and workers: Operating costs and prices for necessities are also steadily increasing, with palpable price hikes for cardboard packaging and metal bottle caps to energy and raw inputs, such as tungsten for semiconductors and satellites. A shortage of workers with requisite skills may also hinder investment, with more than 30,000 businesses surveyed by the European Investment Bank citing staff shortages as a major obstacle.