Stephen Walters considers the continual slide in private investment in Australia and the implications this may have in the long term.
We are four years on from the record-high peak in private investment spending back in 2012, and yet there still are no clear signs of the slide bottoming out. The latest official data showed that economy-wide investment dipped again in the September 2016 quarter, taking the decline since the peak to more than 35 per cent. This is a larger slide than was seen during the early 1990s recession.
The extended weakness in investment comes despite the Reserve Bank of Australia (RBA) having taken interest rates to record lows which, in normal circumstances, should have encouraged firms to borrow to fund investment. There have also been improvements in business confidence since the dark days of the global financial crisis (GFC) that should have encouraged expansion. Government incentives are also available.On the latest evidence, many firms are reluctant to invest. The latest survey of forward looking plans indicates that managers intend to slash investment by 15 per cent in the financial year ending June 2017. The silver lining here is that the magnitude of the expected decline has eased from the previous survey.So what is causing the blockage in the investment pipeline? Before answering this question, it’s worth separating the experience in the resources sector from that of the non-mining economy. Investment in mining peaked at a record high of 7 per cent of gross domestic product (GDP) back in 2013 and was always going to plunge as major projects are completed and production starts. The fall in mining investment from the peak is more than 60 per cent.The situation outside mining is different, and more concerning. The peak in investment spending was much lower than in mining, so there was not the same expected unwind from unsustainably high levels. Yet, investment spending excluding mining has dwindled nearly 10 per cent in the five years since the peak in 2011, with firms in manufacturing leading the decline.There are a number of explanations. Most feed into what former RBA governor Glenn Stevens AC MAICD described as an absence of “animal spirits”, the difficult to measure phenomenon in which intangible conditions necessary for risk-taking and investment fail to materialise.While it’s true that business confidence has bounced since the GFC, it has flatlined recently. Many managers are particularly unsettled by offshore developments – there are lingering fears about the outlook for China and over the future of the European Union. Now, there are concerns about the outlook for global trade under what many expect to be a more protectionist US administration.Decision-makers also want to see evidence that domestic demand is firming before committing to new investment – the latest National Accounts showing that the economy contracted will not help. Some managers also want higher profits and more clarity from policymakers before committing to plans. The failure of the government to pass its planned corporate tax cuts is a headwind, as was the timing of last year’s federal election.Unfortunately, some managers are incentivised to maximise near-term financial performance in what economists call today’s “low return” world by boosting dividend payments rather than investing for growth. Higher near-term returns to shareholders come at the cost of longer-term growth, but cruel contemporary investment intentions. It may also be true that legacy hurdle rates of return on investment have yet to adjust downwards.Public investment has partly filled the hole left by private spending, but there have recently been signs that this too may be waning. In addition to the contraction in GDP, the National Accounts showed an unexpected plunge in public investment.This spending is notoriously “lumpy”, but leaders at state and commonwealth levels worry about ballooning deficits. The good news is that most firms cannot delay investment spending indefinitely. Business assets have finite lifespans and with the accelerating speed of technological change, the lifespan of many assets is being compressed. This reality is probably not sufficient to drive a new wave of investment, but it may at least prevent the extended decline from becoming even worse.
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