Business investment in recession with two quarters of decline

Wed, 05 Dec 2018  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/business-investment-recession-two-quarters-decline-195204034.html 

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Business investment in recession with two quarters of decline

Businesses are under pressure and the economy remains in a problematic state with the latest news on private sector business investment painting a mixed picture. Business investment is the area the Reserve Bank and Treasury have pinned their hopes on for a strong economy into 2019 and 2020.

According to the latest ABS data, business investment fell 0.5 per cent in the September quarter after sliding 0.9 per cent in the June quarter and it was below the level of a year ago.
This is not good, which ever way you cut the data.

Business investment is the bedrock of any economy. When businesses are building factories, shopping centres, office blocks, hotels and the like or are buying new machinery, equipment and vehicles, the productive capacity of the economy is being nourished. This nourishment allows the economy to grow at a faster pace and create job opportunities for workers and good profit growth for the businesses doing the investment. The spin off for the rest of the economy is substantial from the cycle in business investment.

The reasons for the poor investment climate at the moment are linked to a protracted slump in the mining sector where there is a substantial amount of excess capacity that will take some time to absorb. Even with commodity prices being buoyant, the mining sector will continue to scaling back investment spending.

Outside the mining sector, there has been a modest pick up in investment over the past year or so. This is encouraging but it will need to be built upon to see an overall pick up in aggregate investment spending. Business are not raising their invest levels for a number of reasons. The cost-benefit of new investment is clearly not sufficient for firms which a concern that may be compounded by credit conditions.

It is also likely that the ultra-competitive export markets are making it hard for firms with an export focus to increase their capacity. The high profile trade war, where US President Trump has been imposing tariffs on a wide range of Chinese imports and where the Chinese government has retaliated with tariffs of many US goods, risks seeing Australian firms being caught in the backwash and weakening trade.

Despite the decline in investment in June and September quarters, firms are expecting the level of business investment to rise in 2018-19 as a whole. Firms’ expectations for investment in 2018-19 is up 4.4 per cent, a moderate but welcome rise. After account is taken for inflation, this means that investment might rise 2 per cent or so if those expectations are met.

This will be the hot issue for the remainder of the current financial year and it will be complemented by questions on whether there are any issue that come along and cause firms to scale back their investment plans. Even in the relatively short period since the expectations survey was carried out, commodity prices have fallen sharply and the news from the global economy has started to sour. Global growth is slowing. Locally, the falls in house prices have accelerated, the stock market has tanked and even the Reserve Bank is expressing more caution about the outlook.

Suffice to say, the business investment climate remains generally poor. Even if the expectations are met in 2018-19, the contribution to bottom line GDP will be marginal.

If the negative influences come into play and those expectations are undershot, it could be yet another year where business investment falls.

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A few terms first.

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