Capital investment by US-based companies, traditionally the biggest source of global investment, is set to rebound faster than gross domestic product (GDP) growth as the world economy turns the page on the Covid-19 pandemic, according to research from investment bank Morgan Stanley.
“Businesses will look to boost productivity and output to meet a robust demand environment, and counter cost pressures on margins,” Morgan Stanley’s analysts wrote in a research note on May 17.
“This means [capital expenditure (capex)] will generally grow above GDP through our forecast horizon [into the second quarter of 2022], but with some forms of investment driving this more than others.”
The strong recovery of the US economy has prompted analysts to adjust their growth forecasts upwards. Morgan Stanley now expects annual GDP growth to stand at 7.5% in 2021 — its highest level since 1951.
With the economy running hot, US-based companies — traditionally the biggest source of cross-border investment — have been allocating growing budgets to investment plans to address growing demand and supply-side constraints. This has been helped by the government incentives to investments as part of the recovery packages in the US and elsewhere.
The analysts expect investment to be particularly strong on equipment and intellectual property, while ‘non-residential investment’ (including, among others, commercial real estate and factories) will “modestly” outgrow GDP.
Capex is often a direct measure of sales growth — higher sales free up higher resources for capital expenditure. This function is stronger in certain industries than others, as Morgan Stanley’s research highlights.
When it comes to investment on equipment — excluding information processing — businesses in machinery production, electronics and healthcare technology show the strongest correlation between sales growth and investment growth. When it comes to investment on information-processing equipment, semiconductors, communications and electronics businesses show the strongest correlation.