Excess Capacity Dampens Returns

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    The current low financial market returns are likely a reflection of excess capacity, says Benoît Durocher, executive vice-president and chief economic strategist at Addenda Capital. In ‘The Economic Landscape’ session at its investment conference, he said the signs of over capacity still abound seven years after the Great Recession trough. This has resulted in companies no longer investing in capacity and instead directing dollars to areas that do not threaten to increase capacity such as dividends and share buy back programs. If they need to optimize capacity, they are doing so through M&A activity. Global output is increasing so the existing capacity is enough to meet demand. A major reason for the over-capacity is China. Its economy quadrupled in size over the past 15 years and global capacity grew to meet that demand. With the slowdown in China, there is enough capacity there to meet projected demand, but the demand is growing at a slower pace. Other factors include demographics where fewer people are entering the labour force and global population could be down to zero growth by the end of this century. Two-thirds of this slowdown is for structural reasons with only one-third for cyclical reasons. Going forward, he said demand is likely to be slow for some time with industrial economies bearing most of the brunt as there is no substitute for China in the short term.