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EMEA Corporate Pandemic-Related Capex Cuts Vary by Sector

EMEA corporate capex reduction has been a key part of many companies’ efforts to preserve liquidity during the coronavirus pandemic, but cuts were implemented unequally across sectors, Fitch Ratings says. The majority of sectors will see spending start to recover in 2021 as economies reopen, although Fitch expects capex to continue falling in 2021 in those industries where the pandemic will have longer-lasting effects.

Aggregate capex declined across 17 of 22 subsectors in 2020, reflecting the breadth of the impact of the pandemic and subsequent economic slowdown as countries enacted lockdowns and restricted travel. Despite a widespread recovery, the transport and lodging and leisure sectors will continue to limit spending this year as travel restrictions remain. The demand recovery for air travel in EMEA is lagging behind North America and APAC due to tighter travel restrictions. The industry is still running at about 35% of its pre-crisis capacity and we do not expect a full recovery until 2024. European hotels will see a similarly slow recovery in demand.

Other sectors will see stable capex at worst in 2021, but the pace of the rebound will vary widely. For oil and gas, we expect aggregate capex to grow by around 3% in 2021 before accelerating to 9% in 2022, but this will not be enough to recover to pre-crisis levels. Elsewhere among natural resources, other extractive industries and metal producers will see a much more rapid acceleration in investment in 2021 that will take aggregate capex to around 20% above 2019 levels.

Extractive industry capex can be volatile due to the scale of projects. However, the difference in growth mainly reflects the differing performance of commodity prices since early 2020 and subsequent impact on producers’ investment decisions.

Five sectors saw aggregate capex increase in 2020. For telecoms and utilities, this reflected already-planned investment amid limited disruption from the pandemic. Both sectors will continue to increase spending in the near term. Investments in the pharmaceuticals sector keep rising, driven by the drug industry’s technological shift towards more complex drug production, from small molecule products to biologics. In addition, many drug companies pumped money not just into developing vaccines but into expanding capacity to produce vaccines in sufficiently large volumes.

Investment also accelerated in the wider healthcare sector as testing capacity increased. However, the sector has been characterised by growing M&A activity. Retail was the final sector to increase capex during the pandemic. This may seem counterintuitive given the huge impact on non-essential retail during the initial lockdowns. However, it can be explained in part by the much larger aggregate contribution of food retailers that remained open throughout the year compared to clothing and other non-essential sub-sectors.

The sharp increase in online shopping during the pandemic also accelerated the need for investment in omni-channel retail offerings and the logistics needed to meet this changing demand. While the pace of online retail growth will slow in 2021, the compound annual growth rate over two years will be well above that of previous years.
Source: Fitch Ratings

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