April 8, 2020

Corporate Spending: Why so Little?


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euro-spending-e1357236604579by Madeleine Scinto, The Financialist

Difficult economic conditions over the last four years have caused American and European companies to curb spending in an attempt to grow their cash reserves.

The looming question is: When will they start spending again?

American companies seem poised to open their checkbooks sooner than their European counterparts, according to a recent Credit Suisse survey of 120 European and U.S. corporations. While the Euro-zone crisis and the U.S. fiscal cliff have made companies in both places hesitant to spend, European companies face higher hurdles and are less optimistic about the future, the Credit Suisse Executive Panel reported.

“The spending plans of European corporates have deteriorated markedly,” the Executive Panel report said. “The picture is most acute in the peripheral countries of the Eurozone, though perhaps worryingly, Germany has seen the picture soften.”

Credit Suisse analysts and other observers correctly believed American politicians would resolve the fiscal cliff debate, sparing the nation a possible second recession. The survey suggested that companies might start spending once the debate was resolved, releasing some pent-up demand. Europeans are not so lucky.

“There are two crises. One (was) a made-up political crisis,” Aris Protopapadakis, a finance professor at the University of Southern California’s Marshall School of Business told The Financialist. “The other one is an actual crisis in Europe. Europe faces serious structural problems.”

Nearly 66 percent of the European companies surveyed said in October that they plan to cut spending in the next six months – a jump of 3 percentage points since May. Three-quarters of the European respondents blamed the euro-zone crisis for their decisions to postpone or cancel projects.

Meanwhile, 69 percent of American companies said they plan to increase spending in 2013, compared to 31 percent who planned to cut. Still, 38 percent of companies surveyed said they planned to delay or cancel projects due to the uncertainty surrounding the fiscal cliff.

A recent Business Roundtable survey of 143 CEOs this week showed 23 percent expected to cut capital spending in 2013 – up from 19 percent in September.

The difference in attitudes reflects the two regions’ economic performances. Eurozone GDP fell 0.1 percent in the third quarter, while the U.S. experienced a 2.7 percent surge. A recent Credit Suisse report, “Corporate spending: two steps forward, one step back,” said European corporate spending does not usually pick up until GDP growth reaches between 0.5 percent and 1 percent.

Negative growth and Eurozone uncertainty also make it difficult for European companies to access financing: 48 percent of them told Credit Suisse they found it harder to get a loan in November than in May. European companies are also starting to see cash levels fall, the Credit Suisse report highlights.

U.S. corporate balance sheets are notably stronger. The Credit Suisse note said American corporations have $200 billion more on their balance sheets than they did at the end of 2007. That’s equivalent to 4.5 percent of assets, a level not seen since the 1960s.

Even among the companies in both regions who plan to cut spending, the outlook is different in the U.S. and Europe.

Both European and U.S. businesses plan to cut spending on lighter sectors like advertising and travel. But European respondents also said they will stifle machinery and plant investment by 15 percent.

“They know they have a real crisis,” said Protopapadakis. “If you know people are not going to demand your products, you’re just not going to order new machines or start new plants.”


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