More uncertainty means less investment
Business investment has weakened amid slowing demand and rising costs. Despite a record high value of definite projects, uncertainty clouds future investment prospects.
The outlook for business investment has deteriorated over the past year according to Deloitte Access Economics’ latest Investment Monitor report. The slowdown in the Australian economy has hit business revenues. This has particularly been the case for businesses reliant on discretionary consumer spending such as those in the hospitality and retail trade industries.
At the same time, operating costs continue to increase. Labour costs are above their long-run average and are expected to remain so through 2025, while non-labour costs such as energy and insurance are also rising.
This challenging operating environment of decelerating demand and rising costs is starting to chip away at profits. Many businesses have been able to pass on higher costs to customers. This has kept profit margins around pre-pandemic averages. But total business profits fell over the past year, with large falls in the mining industry and smaller falls elsewhere.
Businesses are now responding by implementing cost-cutting measures. Against this backdrop, many businesses will find it prudent to shore up their balance sheets and wait for greater certainty around the broader macroeconomic environment before investing.
The total value of projects in the Investment Monitor database has continued to fall from a mid-2024 peak. A total of 50 projects were completed this quarter, more than offsetting the effect of new projects entering the database and upward cost revisions at existing developments.
Despite not expanding in recent months, the value of the Investment Monitor database remains approximately 15% higher over the year. The database now includes a total of $505 billion worth of definite projects (which are defined as those under construction or committed) – a record high. Definite project investment increased by $81 billion, or 20%, through 2024. Almost all of this was due to projects in the transport and renewable energy industries progressing through the planning stages.
Chart 1: Value of definite project investment in the Investment Monitor database
Source: Deloitte Access Economics
On the other hand, the outlook for future investment is less favourable. The value of planned projects in the database (those under consideration or possible) decreased by $16.2 billion over the quarter to $601 billion.
The risks to this outlook are also rising. The Economic Policy Uncertainty Index for Australia has more than doubled from the recent low in early 2024 to the current reading in early 2025. This has continued a longer-running trend which has seen the average level of uncertainty increase after key economic disruptions such as the global financial crisis and pandemic.
Looking past the current uncertainty, the longer-run outlook for business investment will be supported by several opportunities. Significant investment will be required as Australia transitions toward net zero emissions, while technology trends are promoting investment in generative AI, software, and physical infrastructure such as data centres. These investments, should they be realised, will drive faster rates of productivity growth over time.
This newsletter was distributed on 12 February 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Daniel Kelly, Graduate at Deloitte Access Economics
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