Despite uncertain economic outlook, several companies are investing in capacity expansion rather than productivity improvements.
Fixed capital investment is key to a country’s economic expansion. The FGV in Brazil carries a bi-monthly survey of capital investments in the country to understand how the investment priorities and roadblocks are changing.
The data gives a qualitative view of what is driving investments to allow investors to gauge how fixed the market will evolve.
The change in economic output (e.g. GDP) for a country is dependent on the productivity, capital resources and the size of the labor force. Capital investments affect both capital resources and productivity. When a company replaces an old machine, there is no change, but when it is replaced for a more efficient one, then productivity increases. If it is replaced for one that has higher capacity, then the capital resources increase.
Investment focused on capacity expansion
The survey showed an increase of two percentage points in the share of companies that stated that their principal reason for investing was to increase capacity. This is now almost in line with the 33% of companies which stated that the investments were to increase efficiency, which dropped from 35% a year before.
The share of companies with no capital expenditure program dropped two percentage points and the share of companies investing to replace old equipment for similar capacity equipment increased two percent. Both are now at 17% and 18%, respectively.
Financing costs down increase investments
The survey showed a drop from 46% to 39% of the companies stating that their main obstacle to investing was company resources. The second key concern were taxes, which increased slightly to 37% from 35%.
At the same time, concerns about financing costs eased almost as much as the uncertainty of demand, 4% and 3%, respectively.
Comparing against last year, this survey gives qualitative insight that shows that financing costs are not as relevant and that tax considerations are starting to increase. Additionally, it is interesting to see that demand uncertainty is falling, which has driven companies to invest more in capacity expansion rather than increased productivity.
Over the coming months it will be interesting to observe how the financing costs concerns evolve now that interest rates have increased an additional 50 bps; it will also be interesting to see how demand uncertainty has evolved. The PMI survey is a useful gauge of this.
While the data may seem optimistic, the report also showed that 87% of the companies are finding issues when investing in fixed capital, which is almost three times as much as the 33% observed a year ago. Overall, the outlook in Brazil remains uncertain and the benefits of the capital investments will not materialize until demand increases in a solid manner.
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