Australian business investment to slowly recover

In BICSI Bytes, Newsby

According to Deloitte, business investment in Australia is set to accelerate in the years ahead, but – partly due to slower economic growth and a softening of investment conditions in the non-mining sector – the recovery will be slower than previously expected.

Releasing the latest edition of Deloitte Access Economics’ quarterly Investment Monitor, Deloitte partner and report lead author, Stephen Smith said: “The pace of growth in Australia’s economy has slowed in recent quarters. That matters for investment because businesses are more willing to invest in increasing their production capacity if demand is strong. This is already showing up in easing measures of capacity utilisation, especially in retail, and weaker business confidence.

“Although mining profits grew by more than 25% in 2018, profits in other sectors fell for the first time since 2011. The strength in the mining sector compared to the non-mining sector is likely to filter through to investment. The latest capital expenditure survey by the Australian Bureau of Statistics shows that although investment intentions have grown, the improvement is being solely driven by the mining sector.”

According to the report, there are still a number of positives that will see investment eventually lift:

  • Measures of capacity utilisation remain relatively tight (despite the recent worsening);
  • Interest rates are low, and credit is still readily available for large businesses (although loan availability is constrained for small businesses, it’s large businesses that drive capital expenditure); and
  • The record infrastructure spend by governments – especially in New South Wales and Victoria – has both direct and indirect benefits across the business investment landscape.

“So the backdrop for investment remains supportive,” Smith continued. “An example of this is office construction, where robust gains in white-collar employment are encouraging commercial developments of new office space – particularly in Melbourne.

“Deloitte is forecasting private business investment to remain relatively flat in 2019, before recovering to grow at a faster rate than overall real GDP in 2020 and 2021.”

The shift in project activity is continuing, with New South Wales and Victoria accounting for half of all definite project investment (those under construction or committed), up from around 15% in 2012. The two states also account for close to one third of all planned project activity, the highest share seen since 2001. This is partly due to the end of construction at major mining projects in Western Australia, Queensland and the Northern Territory, but it is also due to the record amount being invested in infrastructure in New South Wales and Victoria – primarily in transport.

Project activity in the transport sector is concentrated in a number of large road and rail developments, many of which are located in Sydney and Melbourne. Major project activity is expected to reach a peak of around AU$19 billion in 2021.

Key Q1 figures:

  • Value of projects in the database rose by $10.4 billion to $689.5 billion – a 1.5% increase from the previous quarter;
  • Value of definite projects increased by $12.0 billion over Q1, as work commenced on a number of projects in the transport and utilities sectors. That said, the value of definite activity remains around 20% lower over the year following the earlier completion of large LNG developments; and
  • The value of planned projects (those under consideration or possible) decreased by $1.6 billion over Q1. Despite this, planned work has grown by 2.4% over the past year.