Will reinforcements save the consumer?

Consumers have fought a lonely battle to keep the world economy afloat for more than three years now. They have selflessly accepted low wage rises, while building up painful debts and sacrificing equity in their property. After such an arduous tour of duty, they are understandably suffering from battle fatigue. So will reinforcements in the shape of businesses and their weapons of capital expenditure be enough to save the day? Businesses have largely been out of the front line since the TMT bubble burst. Throughout the 1990s, they built up excess capacity in the belief that the boom would continue, but they were ambushed in 2000 after over-extending their supply lines. They now appear to have regrouped after cutting costs and getting their balance sheets in order. The current low interest rates also mean they can borrow money at little cost to buy capital equipment. But have they the courage to rejoin the fray and bolster the world economy? In this week’s cover story on page 22, Simon Keane polls fund managers to find out. The news seems to be good. With a few exceptions, fund managers anticipate that companies are ready to start investing again. As a result, some of them are have started to see value in the manufacturing, electronics, technology and aerospace sectors. They observe that companies are increasingly attracting more end-demand for their products. However, actual spending is more evident in the US than in Europe; the improving corporate fortunes of US companies over the last year deserve the credit for this. But even European business leaders, while still reluctant to dig deep into their pockets for victory, are at least more confident about the future. In Germany, for example, the Ifo business climate index rose for the ninth month in succession in January. Of course, bosses will invest only if the benefits of doing so are clear. The reckless spending tactics of the 1990s are over: these days they want to see prospects of real returns. With fourth-quarter US GDP growth coming in at 4% and the earnings upgrades seen in the latest results season, the economy may well be in a position to provide that supportive environment (although the warning by Bill Mott on page 10 should be heeded). And it is to be hoped that consumer strength will not weaken so much that capex has to perform above and beyond the call of duty.