Business investment: the UK corporate cash pile

“Plan A” is that the economy grows rapidly, pulled along by high levels of demand from business investment and rising exports. The government and consumers can spend less and pay back debt.

There are plenty of potential problems with this route map to recovery. But there’s good news too. I was amazed to see data on how much cash is being hoarded by UK firms – potential fuel for the kind of expansion we’re hoping for.

According to The Economist much of corporate Britain has been piling up money for a rainy day. British firms in aggregate have been spending less than they earn for most of the past decade. Saving has increased since the financial crisis struck: at the end of last year the corporate funds left after capital spending, tax, interest and dividends reached 6.2% of GDP. (see chart).

Some might argue that this ‘excess’ saving has hurt the economy. Companies are meant to take other peoples’ savings and generate returns through wise investments. Instead have been huge savers themselves. The recovery depends on (among other things) companies saving less and spending more. As the article points out, how they spend these savings matters, too. Using spare cash to boost the value of existing assets, via mergers, has a smaller economic impact (in the short-run, at least) than creating fresh ones by building new factories or upgrading old facilities. Firms may also look to expand overseas.

What’s especially important is that firms have enough confidence to splash out and become less anxious about holding insufficient cash. Businesses do not even need to draw on their cash hoard to lift the economy. It would be enough if they stopped accumulating cash at the same high rate.