In a new report Fitch Ratings says that EMEA industrial companies are using the scaling back of capital expenditure (capex) plans as the main tool to protect their credit profiles from the recessionary effects of rapidly eroding profitability and cash generation.

"Expected capex in 2009 will be substantially lower than the equivalent spent year on year in 2008 (-29%) and 2007 (-23%). In aggregate, the cut-back on plans made as recently as the middle of 2008 amounts to up to EUR36bn - one-third of the originally expected total of EUR107bn," says Moncia Insoll, Head of EMEA Industrials, Fitch Ratings.

This will have a negative impact on GDP, as business investment typically accounts for around 11-12% in developed Europe. While this is dwarfed by consumer spending, which makes up some 60% of GDP, business capex is more volatile and hence can have an important amplifying effect on the economic cycle. Fitch's Sovereign Group's latest global economic outlook (published on 4 November 2008) incorporates a decline in business investment across Europe, noting that Euro area GDP growth prospects have deteriorated sharply, and that the outlook for investment has darkened.

"The decline in business investment suggested by this bottom up review of corporate investment intentions implies further downside risk to our forecast for GDP in the Euro area, says Brian Coulton, Head of EMEA Sovereign Ratings and Global Economics, Fitch Ratings. "Lower business investment is set to amplify and prolong the decline in private demand that has so far been driven by consumer expenditure and residential investment," he added.

The contraction is, as expected, most notable for the more cyclical industries, i.e. construction & property and basic materials. Such behaviour is normal in a downturn, although the magnitude of current cut-backs exceeds that seen in prior recessions. From a regional perspective, companies domiciled in Russia/CIS are planning the sharpest cuts, in line with the inherently more volatile developments of emerging markets. Companies domiciled in developed Europe are expecting to reduce capex by around 21%.

Major companies, especially in the investment grade universe, are presently undertaking capex cuts mainly on a voluntary basis. Hence, from a macro economic perspective, there is a possible deferred upside to GDP to the extent firms rejuvenate delayed plans once they believe demand is recovering. However, where investment is curtailed due to lack of finance, the deferred positive effect is more uncertain. This may be the case for small and medium-sized enterprises who are suffering from the reduced availability of bank funding.

Fitch reviewed the individual plans for 2009 of 86 industrial corporates domiciled in Europe (including Russia and the CIS), the Middle East and Africa. Furthermore, the agency's top-down assessments of capex plans by other corporate sectors, including the capital intensive energy and telecommunications industries, indicate that the findings for the industrials sphere are broadly representative of the wider economy.