U.K. INSIGHT: The 130 Billion Pound Cash Pile That’s Staying Put

LONDON(Capital Markets in Africa) — U.K. consumers aren’t the only ones who have seen a sharp rise in excess savings during the pandemic. Corporates have had a similar experience and are sitting on a cash pot of 130 billion pounds. The big difference for companies is that debt has risen sharply, too. As a result, we expect capital spending to recover more slowly as the economy reopens.

Reduced uncertainty, higher confidence and, most importantly, the government’s generous temporary capital allowance over the next two years will be the key drivers behind an investment recovery.

We’ve assumed the savings accumulated by households support a rapid recovery in consumption and GDP. Both pass their pre-virus peak in 1Q22 in our forecast. Business investment follows six months later, thanks mainly to the impetus provided by the capital allowance.

Corporate Savings Have Soared
The combination of limited reasons to spend and government support have led deposits in the corporate sector to increase substantially in the last year. Total deposits in the non-financial corporate sector have risen by 183 billion pounds since the end of 2019.

Some of this would have been accumulated anyway, so to account for this we filtered the stock of deposits to uncover a measure of “excess saving”. This shows that at the end of 4Q20 corporates were sitting on a 130 billion pound slush fund. The figure is almost identical to the household sector.

The latest data from the Bank of England suggest this sum is unlikely to change dramatically in 1Q. Despite the lockdown being imposed at the start of the year, the flow of deposits followed their usual seasonal pattern and fell in January and February. An increase is likely in March, but it probably won’t be enough to push excess deposits higher in 1Q.

Like consumers, the big question hanging over corporates is how quickly they will choose to ramp up spending as the economy reopens. And whether they will opt to run down their cash reserves, if at all.

Liabilities Matter Too
One crucial difference with the household sector is that while the move in gross liquid assets looks almost identical, the movement in net assets looks very different. Corporates have taken on more debt while running down assets and raising other forms of finance. Taking those influences into account, the accumulation in net assets over and above what’s normal was closer to 20 billion pounds in 4Q20.

Of course, just like households, the aggregate balance sheet hides a range of experiences through the pandemic. It’s possible that those firms with high levels of debts are in contact intensive sectors, relatively small and capital light. These companies are also likely to have a greater incentive to retain any cash they have accumulated in case the virus flares up again.

In contrast, it could be that the bigger, more capital intensive firms who have been less impacted by the pandemic, such as those in manufacturing and construction, have seen an improvement in their net asset position. To the extent that this holds true, the boost to investment as things return to normal could be bigger than we envisage.

For the purposes of our forecast we have placed most weight on the aggregate balance sheet position, and so we see excess savings doing little to boost capital spending in coming years. That leaves a number of other forces driving the recovery.

The combination of greater confidence in the outlook as the economy reopens and the vaccine reducing uncertainty around the virus should help lift business investment. Some businesses will also benefit from the diminished Brexit uncertainty, which has been the biggest impediment to capital spending in the past few years. The recovery in the global economy will help too.

The government has also announced temporary capital allowances for the next two fiscal years, enabling companies to offset 130% of investment spending on eligible plant and machinery against profits. The policy should provide a strong incentive to bring investment forward. Evidence from the IMF suggests the effect can be powerful.

As a result we brought forward the point at which we forecast investment will pass its pre-virus level by a year to the third quarter of 2022. That’s still slower than consumption and GDP, which pass their pre-virus peak in 1Q22, but it’s enough to eliminate some of the disconnect between respective recoveries in corporate and household sectors over the coming year.

Dan Hanson covers the U.K. for Bloomberg Economics in London. He previously spent seven years at HM Treasury working on a variety of U.K. macroeconomic issues.

Source: Bloomberg Business News