The latest economic data shows firms (and consumers) are still hoarding cash and witholding investment spending.This despite continuing corporate tax cuts both here in Canada and the USA. Why is this important? Because one man’s spending is another man’s income. If we cannot induce spending, the economic recovery will remain stalled and we will not get back to GDP growth on trend.
There is no mystery here – firms will always err on the side of caution if there is no forseaable return on investment spending. What would provide an incentive to invest and spend is, of course, an uptick in demand. And, without investment spending, demand is likely to remain depressed – sort of a chicken or the egg scenario.
Paul Krugman has written extensively that we are in a liquidity trap and that the normal rules of economic logic don’t apply. The way out, according to Krugman and other macroeconomists, is for government to step into the breach and stimulate demand by doing what private enterprise won’t do – invest and spend. Then, as employment and incomes rise, aggregate demand will rise and induce further spending from private firms.
Despite the stagnant and bleak outlook, this is a good time for firms to part with some cash and invest in their future. Investments which enhance a firm’s ability to compete once demand comes back are wise decisions. Thus, firms should consider spending on initiatives which enhance core competencies and capabilities, infrastructure, and new relationships and alliances.
The time to invest is now – while there is still time to do so. Waiting until the economy revives leads not only to economic stagnation but also to stagnation in thinking. Firms should use this “downtime” wisely to ensure they are prepared for the future.