- Investment may not show through until later 2014/2015
- Capital/output ratios seen returning to normal
- BoE watching movements in currency markets
The pieces necessary for a revival in business investment are falling into place, although the drivers of capital outlays by companies may be quite different than many believe.
That was the thrust of the speech delivered on Wednesday evening by Ian McCafferty, the external member of the Monetary Policy Committee of the Bank of England, delivered at the Nottingham Business School.
Meanwhile, he indicated that officials are monitoring movements in exchange rate
markets, stating explicitly that "sharp movements" are "always a concern", according to Bloomberg.
The above is a fairly typical way for central bankers to flag budding concerns over currency movements.
Nevertheless, he did add: "If [the pound] rose sharply from here it's something that we will study further (...) It's still trading at the top of the range after the depreciation in 2007. It's still competitive."
In regards to investment - a variable which Governor Mark Carney has on previous occasions identified as one of the keys for attaining a sustained economic recovery in Britain - he indicated that while the prices are finally falling into place "more rapid investment growth may not show through until later this year and into 2015".
He also explained that common perceptions that a dearth of funding is the main culprit behind lack of investment up and until now are mistaken.
For starters, the largest firms - who are responsible for the lion's share of investment, approximately 65% - have turned to alternative sources of finance. Smaller listed businesses, on the other hand, typically finance 80% of their outlays in investment out of operating cash flows, on average.
Also, given the importance of retained earnings as a source of internal financing, the link between pension deficits and investment may be important.
No less important is that most slippery of all variables - uncertainty.
Executives took fright at the ferocity of the last downturn, a state of affairs which was compounded by the financial crisis in the Eurozone.
However, we may now be witnessing a sustained decline in uncertainty, McCafferty argued. That may compensate for factors such as pension deficits.
Lastly, the policymaker highlighted how up and until now firms have been 'making do' with their current equipment, mending it instead of investing in new capital goods.
But at current rates of investment capital/output ratios should return to levels consistent with full capacity over the next 12 to 18 months. So to meet future increases in demand they may soon have to undertake new investments, in turn helping to lift productivity, higher wages and sustainable growth in consumption.