Our Insights

Foresight from the frontier.

September 15, 2021
  • In focus: the coming CapEx boom
  • Inflation eases in the US

This week we focus on the CapEx boom.

Capital expenditure is back in the spotlight. After years of under-investment following the global financial crisis – with the years between 2009 and 2020 leading to a depletion of both physical and IP capital stock – global rates of capex are estimated to grow by 13% in 2021. Corporates need to catch up on their investment if they are to remain competitive, and indeed a global resurgence is forecast, across an array of industries. But what’s behind this phenomenon?

Source: S&P Global Market Intelligence,S&P Global

One indication appears to be on the supply side – constraints on supply during the pandemic have had the effect of forcing businesses to invest in new production facilities. Consider the semiconductor sector, where a crunch has prompted a new wave of investment.

Another clear driver has been – and indeed continues to be – energy transition. The need to invest in cleaner energy infrastructure has spurred spending on the production of electric vehicles and batteries, as well as to pour funds into alternative sources of cleaner energy.

Meanwhile, firms have built up record amounts of savings, which stand to support an increase in consumption. The combination of abundant corporate cash piles, preparations for a world reopening from the pandemic, and credit conditions that are more attractive than immediately after the global financial crisis promises nothing short of a boom for capex.

Source: Bureau of Labor Statistics

Our favourite chart this week highlights the easing of US consumer inflation in August, which indicates that price pressures might begin to wane. The headline rate of Consumer Price Index (CPI) stands at+0.3% month-on-month, compared with the +0.4% expected. Core CPI has risen +0.1% month-on-month, compared with the consensus forecast of +0.3%. The headline rate was mainly lifted by the +2.8% rise in the price of petrol and by food, prices of which grew by +0.4%. This was mitigated by a surprise plunge in airline fares, however – by a significant 9.1% – alongside weaker hotel rates which dropped 2.9%. Used car prices also dropped 1.5%, the first time they did so since February this year.

Chinese factory inflation jumps, as input costs rise

The producer price index (PPI) in China rose by 9.5% in August year-on-year, up from 9.0% in July. This was likely driven by energy prices, inflation in chemicals costs and freight rates. A partial closure of the vital Ningbo Zhoushan deep-water port by the East China Sea – the world’s busiest port in terms of cargo tonnage – likely also contributed to the spike in PPI. In fact, the Baltic Dry Index, the benchmark for the price of moving major raw materials by sea, marked this sudden drop in shipping capacity by jumping too. The August data might prove to be a peak in PPI inflation, however, possibly slowing to 2% in the 3rd quarter of 2022.

The US focuses on the labour market – the EZ eyes a slowing economic recovery

Inflation rates in the US have, to a large extent, been driven by labour costs – the unit labour cost serving as a good advance indicator, which currently portends a softening. Faster productivity growth is also likely to dampen future inflationary pressures. That said, the labour market remains in a state of disequilibrium, making forecasts in wage growth challenging.

Across the pond, the meeting of the European Central Bank last week confirmed its relaxed monetary stance, amid signs of a slowing economic recovery on in the Eurozone. Its pandemic emergency purchase programme (PEPP) was scaled back slightly, from €80bn a month to between some €60bn and €70bn; its asset purchase programmes (APP), meanwhile, might be expanded. While fiscal policy in the Eurozone is expected to be tighter next year, it remains much looser than before the pandemic, reflecting a reduction in emergency support.

  • 21st September: As the UN General Assembly kicks off in New York, two permanent members of the SecurityCouncil – the UK and US – will assess their borrowing and current account.
  • 23rd September: The Bank of England is set to make a decision on interest rates, as the European Central Bank convenes its General Council on the same day.

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