Euro-Area Firms Funding Investment With Their Own Cash Over Debt

  • UBS survey shows investment recovery ongoing, but is moderate
  • Uncertainty playing a role in companies’ spending decisions

When it comes to investment, euro-area companies are paying their own way.

A UBS Group AG survey of 1,200 firms in the currency bloc’s four biggest economies shows that 42 percent expect to fund investment from their own cash piles. Bank credit comes in at just 27 percent and UBS said it doesn’t expect this to change soon.

“While both supply and demand conditions for credit are improving, the recovery is arguably coming from a low base,” said the report’s authors led by UBS chief European economist Reinhard Cluse. “In other words, the conditions for credit growth are improving, but the road to full recovery still seems long.”

Credit: UBS

The UBS analysis is backed up by a separate report from S&P Global Ratings, which points to non-financial corporations’ improved balance sheets as a driver of investment growth. That reflects a better global backdrop and consistent economic growth in the past few years.

The danger is that -- rather than spend -- companies choose to pay down a debt load that’s equivalent to more than 100 percent of euro-zone gross domestic product, according to S&P. There’s also the heightened level of uncertainty, which is “putting the brakes on investment growth.” Those concerns could also be the reason companies have shown such a propensity to save and build up cash recently.

According to UBS, investment growth constitutes the “swing factor” in sustaining GDP momentum across the business cycle.

The bad news is that firms’ investment expectations have cooled in its latest survey. Only a net balance of 6 percent of companies say they’ll increase capital expenditure, down from 11 percent in August.

GermanyFranceSpainItalyTotalChange
vs Aug.
Consumer13%5%10%1%7%-4
Industrials5%-4%21%9%7%-4
Materials0%-17%5%0%-3%-11
Total8%-1%12%4%6%-5
Change
vs Aug.
-60-6-6-5

Source: UBS

That percentage is as high as 21 percent in the Spanish industrial sector. The next highest is the German consumer sector at 13 percent. France provides the doom and gloom, with as many firms expecting to decrease investment as increase it.

There’s an “ongoing moderate recovery,” but it’s likely that it “will not be very powerful in the short term,” said the UBS economists.

“The variable that represents the so-far hesitant nature of the euro-zone recovery more than any other is fixed investment,” they said. “Since bottoming out in 2013, investment activity has been relatively shallow by historical standards, and subject to repeated setbacks.”

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