The overbuilding of telecom infrastructure has sapped business capital spending according to a new report by CIBC World Markets.

The report doesn’t see an improvement in business investment spending anytime soon.

“With telecom equipment spending still imploding, and computers/software investment not snapping back to earlier vigor, overall business capital outlays growth won’t do much better than holding level when averaged over the second and third quarters,” says CIBC World Markets. “And even thereafter, the long wait for telecom spending to return as a source of growth will mean an equally long wait for business capital spending to provide its typical impetus to the economic recovery.”

One of the central problems is that the telecom sector has half trillion dollars of outstanding debt to service, so, “Debt-servicing costs are eating up internal cash flow, leaving little for capital spending. And, for many companies in the sector, access to public capital markets has become virtually non-existent.”

CIBC estimates that real business investment in telecom equipment could fall by another 30-40% before industry survivors can consolidate. “Even then, in the absence of some breakthrough application that will exponentially raise fibre-optic usage, it will take years, not quarters, to economically utilize the capital stock already in place. If not for the sheer size of the investment involved, the problems facing the telecommunications sector would appear to be no more than the typical growing pains of a new technology.”

The firm points out that the telecom industry is critical to the financial business. “At their zenith only two years ago, telecom equipment and services stocks represented well over US$2 trillion of the S&P 500’s capitalization. And in the bond market, it is still one of the largest sources for outstanding corporate bonds. The economy and Wall Street can ill afford to ignore what happens to telecom equipment and services providers.”

Weakness in the financial services sector, the largest buyer of computers, is in turn hurting tech spending. “Declining equity trading volumes are seeing online trading firms dump millions of dollars of equipment and related software to save on maintenance.” The report forecasts a gradual acceleration in IT investment to a 10% annual rate by late 2002, which is a third of the pace during the late-1990s.

CIBC says that while IT spending will be much weaker, other business capital expenditures look headed for a typical cyclical rebound. “In contrast to IT equipment, there is no evidence of an overheated spending binge in traditional machinery, equipment and structures.”