ONE reason why interest rates were cut to zero rates in the aftermath of the financial crisis was to encourage business to invest, and thus boost the real economy. Companies have a "hurdle rate" for new investment; a project must offer a higher return than the hurdle rate. Other things being equal (a critical assumption), a lower financing cost should result in a lower hurdle rate and thus that more projects get approved.
But as the graph from Citigroup shows, if one excludes energy and materials, global capex has been flat since the crisis. And the boom in energy and materals investment owes much to the lingering effect of the commodities boom, which ended in 2011, and the development of shale oil and gas. Now that the oil price has plunged, many energy investment projects have been cancelled.
So why hasn't other capex gone up? An obvious problem is the slow nature of the global recovery. If companies do not expect rapid growth, then they will lower the return forecast for any project they consider. Even though, the financing cost has gone down, the number of potentially profitable projects may not have...Continue reading
Source: Business and finance http://ift.tt/1KaENxv
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