RDP 9308: Balance Sheet Restructuring and Investment 5. Conclusion

The early 1990s to date has been a period of balance sheet repair. Borrowings have been cut back and repaid. New equity raisings have taken place. Aggregate measures of debt to equity declined and business credit fell. The restructuring was necessary for some firms while others responded to the incentives provided by changes in the costs of external funding. This process exacerbated the effects of other factors holding back investment. As a result, investment fell more sharply than in earlier downturns despite the fact that many of its determinants held up relatively well.

The advanced state of balance sheet repair means that firms are in a good position to respond to improved economic conditions in the future. Some short-term focus on restructuring may remain given the excess capacity and short-term uncertainty about the outlook. An acceleration of growth and a reduction in excess capacity and a higher level of confidence would, however, mean that firms could focus less on balance sheet restructuring and more on the positive underlying fundamentals for investment. This should be compatible with relatively rapid growth in new capital spending.