Australian businesses are expecting to slash investment next year by more than they have for 25 years.
Official figures show a surprise 0.8 per cent jump in investment in capital goods, which includes such things as buildings and equipment, in the December quarter.
But the outlook is extremely pessimistic, with businesses’ first estimate of capital expenditure for 2016/17 19.5 per cent lower than the first estimate for 2015/16.
That’s the biggest predicted year-on-year fall in business investment in quarter of a century.
Businesses’ planned capital expenditure of $82.6 billion in 2016/17 is also the smallest total sum invested in nine years.
While the fall is predictably led by a 35 per cent decline in mining investment, the figures for the non-mining sector are also weak.
Non-mining capital expenditure is estimated to fall 7.0 per cent in 2016/17.
Westpac senior economist Andrew Hanlan isn’t surprised businesses aren’t willing to commit to significantly increasing investment.
“Ongoing uncertainties globally and domestically, as well as negative spill-over effects from the mining sector, are constraining forces at present,” he said in a note.
Royal Bank of Canada economist Su-Lin Ong expected the investment figures to be revised, but said there were “eye-catchingly weak”.
Ms Ong said the downbeat capex outlook, combined with moderate residential housing construction and modest consumption, meant economic activity would remain sub-trend for the foreseeable future.
“This will keep the RBA’s (The Reserve Bank of Australia) easing bias firmly intact, with further cuts likely in H2 as activity disappoints,” she added.
CommSec economist Savanth Sebastian said rather than cutting interest rates, it may be more advantageous for state and territory governments to provide creative incentives for investment to kick-start the business sector.
“At present low interest rates and strong balance sheets are not tempting businesses to spend with any urgency,” he said.
Commonwealth Bank of Australia economist Gareth Aird agreed, saying it was incorrectly assumed that monetary policy was a cure-all to boost non-mining investment.
“The interest rate lever can help smooth out the business cycle. But it cannot do anything to change the more entrenched and structural impediments to growth,” he said in a note.
“Policies should be developed that encourage and channel capital into projects that improve the productive capacity of the economy over the long run.”