2 FEBRUARY 2023: The post-pandemic lift in business investment has accelerated, and investment is now 10% above the level seen prior to the onset of COVID, compared to a 6.5% recovery across the wider economy over the same period.
But a weaker outlook for the global and Australian economies has seen Deloitte Access Economics revise down its forecast for business investment, which is now expected to grow in 2023, but only modestly.
Releasing the latest edition of Deloitte Access Economics’ quarterly Investment Monitor, Deloitte Access Economics partner and report lead author, Stephen Smith, said: “Over the last two years, most of the increase in investment was due to spending on machinery and equipment, encouraged by generous government incentives.
“New engineering and non-residential construction activity is now showing some signs of life, driven by catch-up spending by businesses and a partial easing of earlier disruptions such as supply chain issues.
“But this boost to activity is expected to be temporary. Measures of business confidence have fallen to their lowest levels since late 2021, in the face of the dual challenge of rising costs and falling demand. This is more than offsetting the long list of positives for investment ranging from robust growth in profits, high levels of capacity utilisation, elevated commodity prices and the large public infrastructure investment pipeline.
“Business investment can be fickle, and against an uncertain economic backdrop, decision makers are expected to delay some planned spending.
“Many private companies continue to demand high investment hurdle rates and have been too cautious with respect to investment decisions. That trend is likely to persist, at least in the near term.
“The investment outlook is expected to vary across the economy. Governments are spending more than one quarter of a trillion dollars on infrastructure in the four years to 2025-26, supporting activity in industries such as transport, health and education. Mining investment remains subdued despite the extended period of high commodity prices – largely because today’s prices are not expected to last. While industries that rely on discretionary spending such as hospitality, tourism and retail are likely to drag behind.”
The risk of a sharper than expected slowdown in the global economy in 2023 presents a key risk to the outlook for Australian engineering and non-residential construction.
“Business investment rises strongly when the economy is expanding and falls sharply when the economy slows or contracts,” Smith said. “That’s because businesses are unlikely to expand their operations if they think the demand for the goods and services they offer will be lower in the future.
“This is important as investment plays a key role in increasing the potential rate of economic growth. More investment today means better machinery, equipment, hospitals, schools, transport infrastructure and workplaces in the future. That translates to faster rates of economic growth and better standards of living.”
There have been six periods over the past 50 years where the Australian economy contracted or slowed markedly on a calendar year basis. Engineering and non-residential construction fell by almost 20% in the recessions of the early 1980s and 1990s while there were only single-digit falls in the wider Australian economy (see chart below). There were also large falls in Australian engineering and non-residential construction in the 1970s stagflation, the early 2000s downturn and the global financial crisis. And even during the COVID-19 recession in 2020, engineering and non-residential construction fell by more than the wider economy.
Key Investment Monitor figures for the December quarter include:
Deloitte Access Economics’ Investment Monitor is primarily a source of information for businesses and others about major engineering and commercial construction projects and their promoters. It is also a barometer of structural change in the Australian economy, and of the investment climate – now and in the future.
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