This week marks Thanksgiving in America. This coming Thursday we will break bread and devour turkey with family and friends and, most importantly, take time to show gratitude for that which is good in our lives. The act of showing gratitude and giving thanks is a universal concept and one that I would like to indulge in this week’s commentary. In that spirit, I take stock of the past year and share with you three market and economic trends for which I am thankful:
1. Global increase in capex spending
There has been a decade-long drought in capital spending, dubbed “the lost decade.” This era of disappointing capital spending, which started during the global financial crisis out of necessity, continued for years afterwards. But now we’re seeing the start of a reversal of this era. According to Standard & Poor’s, this year’s expected total global capital spending will be $2.7 trillion.1 While that would be less than 2007’s level of capital spending – which was $2.8 trillion – it will mark the first year that capex will grow after contracting for four years.
Many countries appear to be increasing capex, spurred by the improving global economic growth picture. For example, we saw business fixed investment in the U.S. increase in the third quarter and contribute significantly to gross domestic product growth for that period. I believe there are several reasons we will likely continue to see improvement in capex spending: 1) the continuation of global economic growth, 2) significantly improved business sentiment and 3) rising interest rates.
China International Corp. Chief Economist Hong Liang explained in a recent note, “There are signs of a significant recovery of capex spending in major economies, which may provide a further boost to global trade.” In addition, increased capex spending may lead to higher productivity. Many economists believe capital investment, which can lead to utilization of the latest technologies, is critical to improving labour productivity. And there has historically been a correlation between capex spending and productivity, suggesting that the low productivity we have experienced in recent years has been a result of lower capex spending. Now that capex spending is on an upswing, this could mean that productivity will improve in the future.
2. Skillful, thoughtful and still-accommodative central banks
In the past decade, central banks have played an incredibly important role in the world. When I think of central banks’ handling of the past decade I am reminded of a quote from former U.S. President John F. Kennedy: “For of those to whom much is given, much is required.” Central bankers recognized the power they had to help ameliorate the global financial crisis – especially in the absence of significant fiscal stimulus – and they used it. Not only did major central banks lower key discount rates to ultra-low levels but they made the bold decision to utilize a very experimental monetary policy – large-scale asset purchases. This was a courageous move that arguably was a critical factor in stabilizing their respective economies and helping them start to grow again.
Now central bankers are facing another difficult task. They are beginning the process of normalizing monetary policy – moving away from the extreme, experimental area we have known for years and returning to a more normal environment. However, this process will be a delicate balancing act, as central banks attempt to keep higher inflation in check without stifling the recovery. This requires thoughtful, flexible approaches. For example, European Central Bank President Mario Draghi announced tapering would start in January – but would not say that it will definitely end in September, allowing some flexibility depending on the market environment. And in the U.S. Federal Reserve’s plan for balance sheet normalization, there is an escape hatch included: the allowance that the Fed could halt the plan if conditions change substantially. The reality is that, as we unwind, we are in uncharted territory. We will need talented, thoughtful central bankers to negotiate the normalization process.
The resilience of institutions
A number of critical organizations and entities have come under pressure in recent years, but thus far have survived. For example, the European Union came under pressure as the U.K. voted to leave it. Some pundits were predicting the death of the EU, as other countries would likely follow the U.K. However, the EU is still standing, with the potential for reform and a tighter union in its future, as laid out by French President Emmanuel Macron. Similarly, Brazil has been in the midst of a series of corruption scandals, but its economy has largely shrugged them off and is emerging from recession.
On November 18, it was revealed that German Chancellor Angela Merkel was unable to form a coalition government with the Green Party and the pro-business Free Democratic Party (FDP). Now Merkel has a few options – none too appealing: 1) renew the coalition she had with the Social Democratic Party of Germany (SPD), although SPD has repeatedly said it is not interested; 2) attempt to form a minority coalition government; or 3) dissolve parliament and call new elections. The latter seems increasingly likely, although it carries with it the risk of giving more power to the right-wing nationalist Alternative for Germany party. Some may worry that Germany will become unstable; however it seems unlikely given how strong business sentiment has become. New elections will likely be another small hiccup, as institutions bend rather than break.
Thank you to our clients
Finally, I would like to thank our clients. At Invesco, we strive every day to give people an investment experience that helps them get more out of life. This is an important endeavour, and we can’t thank you enough for putting your trust in us. We are most grateful.