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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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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Life has changed forever.

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.