Before the Covid-19 crisis pole-axed the economy, private sector business investment was already in the doldrums.
From a peak in the June quarter 2012, businesses investment in real terms had fallen a staggering 36.7 per cent through to the 2019 December quarter. This was driven by a slump in mining investment, but all sectors had been broadly flat or down in recent years.
In the March quarter this year, business investment fell a further 2.1 per cent, and then dived 5.9 per cent in the June quarter as the COVID-19 lock down was implemented through the bulk of Australia.
Between the 2012 June quarter and the 2020 June quarter, real business investment has collapsed by 41.7 per cent. The level of investment is now back to the level of late 2007. In real terms, business investment has fallen in eight of the last nine quarters.
Making matters worse are the expectations for business investment for the remainder of 2020-21 where a further decline of 12.6 per cent is on the cards according to the responses of the business sector.
For all economists and policy makers, this is depressing news and apart from being poor news in terms of immediate GDP growth, it undermines effects to increase productivity.
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Why does business investment matter?
Private sector business investment is the backbone of the economy. It covers spending on computers, machinery, trucks, factories, warehouses, office blocks, planes and IT systems and the like.
It reflects the underlying strength of the economy.
When businesses are optimistic about the outlook and their ability to make a profit and when their risk taking and entrepreneurial flair and skills presents a fresh business opportunity, they will invest in new equipment, new computer systems, new buildings and all of the capital inputs to make their plans work.
This is how an economy grows in a longer run and sustained fashion. At one level, it is easy to see why airlines are not buying new planes or hotel chains are not building new hotels or retailers would be looking at new stores.
The COVID-19 effect is dramatic. While the health crisis is far from over, the seeds of a long period of economic funk have been sown and unless this changes soon and dramatically, Australia could be condemned to several years of hardship.
Policy to fix the problem
It is important that policy settings be tilted strongly to support a recovery in business investment.
The RBA has set interest rates at record lows which is supportive for firms looking to borrow to fund expansion. This is good news, although there remains a debate whether the RBA could cut further, perhaps embracing negative rates, if economic conditions remain weak.
The government, with the budget on 6 October, is under pressure to do more to underpin the overall level of economic growth, but also to look at specific measures to drive business investment higher.
Tax incentives, which are already in place, could be ramped up. Having an infrastructure program that engages the private sector to be a critical part in planning and construction seems an obvious measure.
At the end of the day, businesses will be reluctant to borrow, invest and employ while there are worries about the outlook for the economy. If they cannot see a high probability of getting a positive return from their investment, they will hold off new investment spending.
While the most recent investment data were bad news and worryingly, they pre-date lock down in Victoria. The next quarterly business investment numbers will almost certainly show a further fall.
Unfortunately, a fully-fledged and sustainable economic recovery is still some time away.
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