The Weather Economy

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Savvy corporate leaders are homing in on the increasing rate that capital flows into—and out of—countries.

It’s late fall in New York City. The weather is cold, wet and windy—normal for the time of year. Forecasters see frigid air bringing the first big snows of the season to the Midwest. Come June, across the globe, Indians will expect the monsoon to drench the land. Atmospheric thermal systems, which vary considerably from day to day and year to year, determine the local weather. In turn, the weather affects crop yields, making the difference between drought-induced disaster or a year of abundance. No matter how ripe the land is, the weather changes everything.

Pay attention, corporate leaders, because it turns out that in the world of global economics, the same is true. Economists say no matter how much potential a country may hold, it needs capital to grow, and just like the weather systems swirl around the atmosphere, capital flows from country to country. Call it the “weather economy.” Business leaders, from savvy CEOs to chief financial officers who rely on revenue forecast models, know all too well the importance of knowing which countries are losing capital—and which ones are gaining it. Only now there is evidence that the pace of capital or investment coming in—and leaving—countries has picked up, creating a whole new need to follow the weather economy even closer.

To some degree, the mere existence of a much more global economy, with more trade and bigger multinational companies, is causing the shift. Julien Acalin, a research analyst at the Petersen Institute for International Economics, also cites fewer currency controls in many countries and the rise of electronic transfers.

Either way, the numbers are fairly astonishing: In just under two years ending late 2016, non-residents yanked $1.2 trillion in capital from China, according to estimates from the Institute for International Finance. That’s around 10 percent of China’s economy. Over in the United Kingdom, $906 billion was pulled out in 2013. And it isn’t just money going out the door: Brazil saw an influx of at least $500 billion in foreign capital every year from 2010 through 2015, up almost tenfold from a decade earlier. Ever wonder why the U.K., pre-Brexit, was so robust? Foreign investors sunk a remarkable $2 trillion into that economy in 2010 alone.

Though not quite the center of attention in most boardrooms, these kinds of capital flights and influxes play a huge role in how companies perform. It determines how much investment goes into a country’s infrastructure, and to a large degree employment opportunities. Retailers will do great internationally if they know where to focus their efforts and inventories; manufacturers will staff accordingly. It’s what creates the ability to buy equipment locally, increase hiring and raise capital in the stock market.

At a bare minimum, a country needs to save in order to grow. But if it wants to expand at an even faster rate, then it needs foreign capital. “When you have higher investment than savings you need to find investment from outside the country,” says Acalin. The whole thing comes down to a very simple idea: Capital is the cash that people have saved, now being put to use in growing the economy. It heads where it’s treated best.

Annual Inflow and Outflow of Capital (click the image to enlarge)

For most countries, capital comes from investors or lenders. The past few years have seen massive floods of foreign cash heading into Latin America’s biggest economy, Brazil. The high growth, fueled by commodity exports and a rising population, made it attractive. In 2015 the country saw $70 billion, or 14 percent of total incoming capital, from bank loans. On top of that there were investments in stocks and securities, for a further $115 billion inward purchases of securities. But that turned sour in a trice. In the first half of 2016, foreign investors got spooked: Bank loans contracted and foreigners dumped Brazilian stocks—the total outflow from the two types of investment: $40 billion. Why? Blame a corruption scandal, a falling currency and a fiscal crisis. (See “Brazil: Booming, Busting … and Now?” on page 48.)

Another type of capital is foreign direct investment (FDI). It’s not so flighty as other capital, in part because some capital is simply hard to move, like new factories. “FDI is based on long-term commitments, and it tends to last,” says Petersen’s Acalin. In October, Japanese carmaker Nissan announced it would upgrade its factory in Sunderland, England, into a “super plant,” according to the Guardian newspaper. It means more jobs, more growth for Britain.

It should be obvious that Nissan’s money will flow into Britain’s economy. But it isn’t always so clear. “It is very unusual that you can measure exactly how much capital is flowing,” says David Ranson, director of research at HCWE & Co. Government statistics don’t cover everything, and they aren’t all created equal. U.S. government data is different from those from China. The information available is an estimate. But there are other clues about what is happening.

“One of the major indicators we look at is the balance of payments of countries: The trade deficit or surplus,” says Ludovic Subran, chief economist at business-to-business credit insurer Euler Hermes in Paris. If a country imports more than it exports, as does the U.S., then other countries lend the money. Currency stability is another indicator: A stable currency is more likely to attract capital—and vice versa, which helps explain the flight from both China and Brazil when their currencies plunged. (Would you keep money in a bank account that shrank your balance over time? Not likely.)

There is one plus to a country losing a lot of investment; the sooner the cycle ends, the sooner more money tends to return. But the faster-changing movements of today can make investors nervous and, thanks to better technology, investors and lenders large and small can transfer funds in a nanosecond, which only adds to more frequent and larger capital flows. It’s the weather economy’s own form of global warming.

“The long-term trend of the increasing global financial openness is likely here to stay,” says Bill Adams, senior international economist at the PNC Financial Services Group, in Pittsburgh. “It means more fast global moves in capital is the new normal.”