An economic pick-up in Europe this year will exceed expectations as capital spending picks up, accor...
An economic pick-up in Europe this year will exceed expectations as capital spending picks up, according to SchroderSalomon- SmithBarney (SSSB).
Analysts at the group say capital spending is becoming increasingly sensitive to the business cycle, suggesting investment will recover fairly soon.
An EU Commission report, conducted in October, showed that companies anticipated a contraction of investment activ- ity in 2002 of 5%, but SSSB believes this was due to the pessimism felt by people following the events in September.
Carmen Nuzzo, an analyst with the group, said: 'Euro-area businesses abruptly adjusted Capex plans downwards in 2001, resulting in a 0.2% average decline in investment over the year, the first annual contraction since 1993.
'The weakness intensified as the year progressed, with the largest ever quarter on quarter drop recorded in the fourth quarter. However, the seeds for a rebound during the course of this year already appear in place, in contrast to last year's downward surprise.'
Financial conditions are improving and companies are likely to restore profitability, especially in light of the looser monetary policies in the European region.
Early hints of an increase in capital expenditure are already visible, said Nuzzo, adding that while the initial acceleration in growth largely reflects exports and inventories, a subsequent pick-up in business investment will probably give the recovery staying power.
A sign of an improving climate for Capex was seen in December, when production of machinery and equipment rose for the first time after falling in the previous three months, while output of transport equipment also started to rise.
Nuzzo said: 'Euro-area productivity gains continue to lag the phenomenal performance of the US, but euro-area companies were also quick to slash inventories last year. At the same time, last year's sharp economic slowdown will probably help to keep labour costs in check this year so that the fruits of recovery will accrue initially to firms, as higher profits, rather than workers.'
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