The economy is intricately woven. Although consumption accounts for about 70% of the GDP, this consumption wouldn’t be met if the supply was cut short. The point here is – all aspects of the economy are intertwined. Therefore, a change in one aspect of the economy is bound to influence the others significantly. In this article, we will see how investments by businesses influence the economy and how it impacts the forex market.
Understanding Business Investment
In the most basic sense, business investment is defined as spending money to acquire assets, start a business, or expand a business with the anticipation of making profits.
As an economic indicator, Business Investment’ represents the change in capital expenditure in the private sector. This expenditure is an inflation-adjusted value.
Source: Ernst & Young UK
In the UK, for example, business investment data is published quarterly. The data in this report is usually segregated depending on the asset type. These categories include; private sector business investment, investment in transport equipment, investment in ICT equipment and machinery, investment in buildings and structure, and investment in intellectual property products. Cultivated biological resources and the manufacture of weapons are included in the calculation. Note that the following are excluded from the calculation of the data in this report: expenditure on residential dwellings, expenditure on land and existing building, and the cost of ownership or transfer of non-produced assets.
In the calculation of the Business Investment’ in the UK, the data from the Annual Business Survey (ABS) is used to establish a benchmark on investment for various industries.
Using Business Investment in Analysis
As we mentioned earlier, business investment is part of the GDP and is also correlated with other economic aspects. The fact business investment data measures the value of the inflation-adjusted value of capital expenditure gives us a dependable ‘real’ figure of the economic activities over a specific period.
The primary effect of business investment will be on the labor market. When business investment increases, it could mean that new business ventures are being set up or the existing ones are being scaled up and expanded. In both instances, it means that more labor will be required. Remember that business investment encompasses investments made in any profit-making venture; it could be in agriculture, in the financial markets, or the informal sector. As a result, increased business investment lowers the rate of unemployment in the economy.
Furthermore, the increased production leads to the growth of output hence higher levels of GDP.
Source: Ernst & Young UK
Conversely, when business investment decreases, it could imply that economic activities are being scaled down. Scaling down operation implies that less labor will be needed. The result is an increase in unemployment levels. More so, scaling down operations implies low economic outputs hence lower levels of GDP.
Business investment goes hand in hand with the level of demand in the economy. Business investment can be said to be responding to levels of demand. Therefore, when business investment increases, it means that there is a higher demand in the economy. By itself, the increased demand means that other aspects of the economy, such as the labor market, are performing well. On the other hand, decreasing business investment means that demand is falling. Demand Reduction is synonymous to a contracting economy.
The business investment data can also be used to analyze the business cycles and, as a result, help in forecasting recessions and recoveries in the economy. Using historical data on business investment, we can establish a pattern. This pattern will show us periods when business investments were slowing down, when they were stagnating, and when they were rapidly increasing. Naturally, periods when business investments are increasing can be regarded as the expansion stage. The recession stage is characterized by a continuous fall in business investments. When business investments have stagnated, this period could be considered the peak of the business cycle.
In predicting recessions and recoveries, let’s use the example of the coronavirus pandemic. Towards the end of the first quarter of 2020, business investments dropped continuously. The continuous drop in business investment was because investors anticipated the demand in the economy to be severely depressed, especially in the consumer discretion industry. While other sectors of the economy saw some increased investments, most sectors experienced a drastic reduction in business investments. The primary goal when making any investment is to earn profits. In this instance, due to the social distancing rules, massive losses were forecasted across the economy. As a result, business investment reduced as investors looked to reduce their exposure to a contracting economy.
At the beginning of the third quarter of 2020, business investment started increasing. This period signified the beginning of economic recovery from the coronavirus-induced recession. The recovery was prompted by a host of expansionary monetary and fiscal policies implemented by governments and central banks. These policies included lowering interest rates and offering economic stimulus packages of trillions of dollars. These policies signified the revival of the economy to the private sector, hence the increase in business investment.
Impact of Business Investment on Currency
In the forex market, the level of business investment can be used to foretell the policy actions of governments and central banks.
In any economy, the private sector is the single largest employer. Therefore, when the business investment is continuously falling, it can be anticipated that the labor market conditions will worsen, and demand in the economy will be severely depressed. This scenario may trigger expansionary fiscal and monetary policies to stimulate the economy and avoid a recession. Such policies make the domestic currency depreciate relative to others.
Conversely, the currency will appreciate when business investment increases. This increase can sign that the economy is performing well with an increase in the money supply. Contractionary monetary and fiscal policies may be implemented to avoid runaway inflation and prevent the economy from overheating. These policies make the domestic currency appreciate.
Sources of Data
In the UK, the Office for National Statistics publishes the quarterly business investment data. Trading Economics has in-depth and historical data on the UK business investment. It also publishes data on global business investment.
How Business Investment Data Release Affects The Forex Price Charts?
The most recent publication of the UK’s business investment data was on September 30, 2020, at 6.00 AM GMT. The release can be accessed from Investing.com. Moderate volatility is to be expected on the GBP when the data is released.
In the second quarter of 2020, business investment in the UK decreased by 26.5%, which was better than the -31.4% expected by analysts.
Let’s see how this release impacted the EUR/GBP pair.
EUR/GBP: Before the Business Investment Data Release on September 30, 2020, just before 6.00 AM GMT
The EUR/GBP pair was trading in a weak uptrend before the publication of the UK business investment data. As shown in the above 15-minute chart, candles are forming just above the 20-period MA.
EUR/GBP: After the Business Investment Data Release on September 30, 2020, at 6.00 AM GMT
The pair formed a 15-minuted bearish ‘Doji’ candle after the news release. Subsequently, the pair adopted a bearish trend.
While business investment is a significant indicator in the forex market, we may not entirely know the extent of its impact on the GBP. This is because its publication is scheduled at the same time as the GDP – which is a high-impact economic indicator.