THE absence of a strong capital spending improvement has been one of the lamentable stories of the post-global-financial-crisis recovery. Investment growth is often still below pre-crisis investment growth, seven years after the crisis. Even with interest rates at record lows in developed economies, companies seem reluctant to invest in the future.
What makes the weakness of capital spending even more confusing is the fact that in many countries, the number of businesses has continued to grow, without any interruption in that pace of growth. More businesses should mean more offices, more office furniture, more computers and more machinery — but in recent years, there have been more businesses but less capital spending. This just seems weird.
One possible answer to this conundrum lies in the fact that in many economies, there has been an increase in self-employment and small businesses. For example, roughly three quarters of the businesses that exist in the UK today do not employ anyone because they are self-employed people running their own business or consultancy.
This trend has increased significantly in the years since the global financial crisis. So there are more businesses, but very often the increase has been owing to a rise in "one-person" businesses, or at least businesses with a very limited number of employees. Data is hard to come by, but small businesses account for at least half the private sector capital spending that takes place in an economy.
Along with this trend there has been something of a seismic change in how technology works. About 15 or 20 years ago, a computer meant a desktop computer — some kind of hulking beast that could not be moved without considerable physical effort, and which was purchased by a company and inevitably located in a fixed location in a company's office. Today, of course, we have laptops and tablets, and these are ideal forms of technology for a small business or consultant. They are also highly portable and do not have to be held captive in an office environment.
But, if a small business is being run from a tablet computer, who buys the tablet computer and what else is it used for? One can readily imagine the business owner having to cruelly wrench the tablet from the protesting hands of a five-year-old child before getting down to his or her inventory management.
A tablet computer is suitable both for managing company accounts and for playing "Angry Birds" — its versatility is of course part of what makes it so useful. However, this versatility also introduces an element of confusion into the economic data. Small business employees can make use of the existing stock of technology that they already own in a personal capacity.
When they come to replace the technology — to purchase the latest tablet computer or upgrade to the newest smartphone — the chances are that the purchase will be classified as consumer spending and not as capital spending. People are using their own capital for work — you buy the computer, so your employer does not have to.
It is not just technology. We do not have to become coffeeshop dwelling hipsters to recognise that blurring the distinction between home life and business life will mean less corporate spending on office space, less corporate spending on office furniture and less corporate spending on other equipment.
What is happening is more than just a reclassification of capital spending by companies into consumer spending by individuals. What is happening is a more efficient use of the capital stock in an economy. Rather than working at a computer in an office and having a laptop sitting idle at home during the working week, the laptop is now fully used — economists would describe this as an increase in capital utilisation. The office space is redundant, or can be used by someone else.
For economists and investors alike, this means two things: First, capital spending may never "normalise" because at least some capital spending is masquerading under the pseudonym of "consumer spending"; second, capital spending may never "normalise" because we are merging corporate and consumer capital into one form of investment and using the whole lot more efficiently.
It should be noted that the research for this article was done on a personal laptop, using a personal internet connection, at my own desk in my own home. My employer did not pay a penny towards any of the capital used in the production of this research.
Paul Donovan is senior global economist at UBS Investment bank. His latest book, The Truth About Inflation, was published by Routledge in April 2015.
This article first appeared in Forum, The Edge Malaysia Weekly, on May 25 - 31, 2015.