Tags: El-Erian | corporate | investment | growth

El-Erian: More Corporate Investment Needed to Sustain Global Growth

By    |   Wednesday, 05 Mar 2014 08:31 AM

The global economy needs more corporate investment to achieve a strong expansion, says Mohamed El-Erian, outgoing CEO of Pimco.

"After too many years of inadequate growth in advanced economies, substantial longer-term risks have emerged, not only for the well-being of these countries' citizens but also for the health and stability of the global economy," he writes in an article for Project Syndicate.

"Those looking for ways to reduce the risks of inadequate growth agree that, of all possible solutions, increased business investment can make the biggest difference."

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Large and many medium-size companies are now in good financial shape to invest in new plants and equipment and increase hiring, El-Erian contends.

Record profitability has sent U.S. corporate cash coffers to record highs, El-Erian notes. "The corporate sector in advanced economies in general, and in the U.S. in particular, is as strong as it has been in many years," he adds.

"But, rather than deploy their abundant cash in new investments to expand capacity and tap new markets, which they have been very hesitant to do since the global financial crisis erupted, many companies have so far preferred (or have been pressured by activist investors) to give it back to shareholders."

Share buybacks and dividend hikes are the rule of the day, but it's only shareholders who benefit, El-Erian argues.

"Little of it has directly benefited economies that are struggling to boost their growth rates, expand employment, avoid creating a lost generation of workers and address excessive income inequality," he states.

"If advanced economies are to prosper, it is necessary (though not sufficient) that the corporate sector's willingness to invest match its considerable wallet."

He identifies six factors that are holding companies back:

1. They "are concerned about future demand for their products."

2. They are concerned about growth in China, which has become a very "influential driver of global demand."

3. "While companies recognize that innovation is a key comparative advantage in today's global economy, they are also humbled by its increasingly winner-take-all nature.

4. "In the U.S., many companies expect major budgetary reform, but they are not yet able to assess the impact on their future operating profits.

5. "The scope for risk mitigation is not as large as financial advances would initially suggest.

6. "Working essentially alone, central banks have not been able to revamp properly the advanced economies' growth engines, nor do they have the tools to do so."

There's good news and bad news out of this, El-Erian maintains.

"The good news is that each of these constraints on investment can — and should — be addressed," he writes. "The bad news is that it will take a lot more time, effort, and global coordination.

To be sure, Matt Phillips of Quartz writes that "U.S. corporations are indeed plowing money into long-term business investment projects."

Companies in the Standard & Poor's 500 Index spent an estimated $163 billion on investment in the fourth quarter, a record high, according to S&P Index analysts, he notes.

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The global economy needs more corporate investment to achieve a strong expansion, says Mohamed El-Erian, outgoing CEO of Pimco.
El-Erian,corporate,investment,growth
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2014-31-05
Wednesday, 05 Mar 2014 08:31 AM
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