commissioner.org
| Source | Autoplectic |
| Date | 05/07/26/01:55 |
| Corporate cash-saving equals economic strangulation
Charlotte Moore Monday July 25, 2005 Guardian Corporations around the world are undermining the raison d'etre of business life. Instead of investing in their companies, they are holding on to their cash and saving rather than spending. This love of saving poses a bigger risk to the global economy than the trade and current account imbalances between the United States and China, argues Stephen King, the chief economist of HSBC. Whether the companies are based in weak or strong economies, they are keeping their high profits as cash rather than investing in new business opportunities. The implication, says Mr King, is that they simply do not know what to do with the cash. Buoyant profits usually mean high levels of confidence and optimism about the future. This translates into firms investing excess cash and even borrowing to fund expansion. When companies borrow to invest, they suck cash in from other sectors of the economy, including the household sector. "This, in one sense, is why companies exist: they are better at using people's savings than the people themselves are and, as a result, they typically run a financial deficit to allow them to invest their shareholders' and bondholders' money," Mr King says. But at the moment, rather than investing excess profits, firms are using them to pay off debt, boost pension schemes or return funds to the shareholders. Interest rates around the world have been low over the past five years and as companies used their profits to pay off debts, consumers have spent more. Low interest rates led to higher levels of household borrowing, both through unsecured loans and rapidly rising house prices. In the UK, however, the economic data is pointing to consumers beginning to tighten their belts while companies are still hanging on to their cash. Business investment and confidence levels are low. If the consumer is not spending and the corporate sector is not investing, the obvious question is where will economic growth come from? With interest rates in the UK currently at 4.75% - higher than both the US and the eurozone - the Bank of England's monetary policy committee has the option of cutting interest rates to stimulate demand. Luckily, in the US, consumer spending is still strong, and business investment has been better than on this side of the Atlantic. But if either of these wobble, with interest rates at only 3.25% there is limited room for manoeuvre. The eurozone is in the worst situation, with rates at 2% and the most stagnant growth of all. Unless businesses start investing their cash and if the consumer remains reluctant to spend despite cheap money, the usual tools of macroeconomic policy could be close to exhaustion, warns Mr King. |
Copyright (c) 1998, Joongpil Cho