This article was originally published in the The Australian on December 19, 2021.
Business investment has for some time now been the Ebenezer Scrooge of the Australian economy, miserly beating away optimistic predictions of a sustained lift in non-mining investment in the wake of the mining investment boom.
Australia’s economic growth before the pandemic was lacklustre with a dearth of jobs rich, productivity enhancing investment a major contributor as business investment sank to levels not seen since the early 1990s recession.
Private business investment is a key driver of economic growth and productivity. When a business invests in new technology and equipment, invariably this drives greater output for each person working in that business.
Could it be that the ghosts of Christmas Past, Present and Yet to Come have finally arrived to show us the error of our ways and revive business investment in time for Christmas, just as they did for Scrooge in Charles Dickens' 1843 novella A Christmas Carol?
There are certainly some encouraging signs. The latest ABS data reveals record investment intentions across the non-mining sector this financial year. A recent CEDA survey of 41 CFOs from large Australian businesses reinforces this – finding that over 60 per cent of the firms surveyed are planning to increase their capital expenditure in the next 12 months. CFOs are most bullish about their intentions to invest in technology – 95 per cent expect to increase investment in technology in the next three years compared to pre-pandemic trends.
Over the last two years of the COVID-19 pandemic we’ve seen businesses respond with agility and manage to survive, and even in some instances to thrive. The unique circumstances of the pandemic broke down the usual impediments to rapid change and execution of new strategies. Many believe the economic recovery from the effects of the COVID-19 pandemic will be in part driven by elevated levels of business investment, coming off the wave of necessary innovation and organisational changes that resulted from COVID-19.
But we should not expect that any revival in business investment will be easily won, with businesses simply writing an open cheque for investment projects. CEDA’s survey of CFOs and recent research from economists at the RBA suggests that expectations of capital discipline and risk premiums remain high. Despite record low interest rates, companies retain high hurdle rates, with most requiring a rate of return north of 10 per cent on projects or investments for them to go ahead.
A range of explanations have been offered for this trend including that perceptions of risk and uncertainty may actually increase when interest rates decline. It is also possible that there are not enough managers or workers to engage in investment projects. The long-term nature of some projects may also make companies more risk shy today.
What can Australia do to lock in the best chance of sustaining and building on the encouraging signs in business investment for years to come?
The most important factor identified by CFOs in driving investment decisions over the next 12 months is domestic economic conditions. The delta variant showed once again that COVID-19 thrives on vulnerabilities wherever they exist and resulting restrictions erode business and consumer confidence, and detract from economic growth. COVID-19 may have some curve balls left yet especially as many countries remain largely unvaccinated. Our best defence will be playing aggressive offence on vaccines, moving rapidly on vaccination for young children and booster shots in the new year.
CFOs identified access to appropriately skilled workers a close second, with close to 70 per cent of CFOs identifying this as important or very important to investment plans in the next 12 months. While the nature and causes of skills shortages will be different across sectors and occupations, it is apparent that if they are not resolved in a timely fashion, it will delay investment plans. Research suggests that labour shortages or insufficient management capability may also be feeding into higher hurdle rates for some companies
Keeping international borders open to skilled migrants and implementing the recommendations of the recent Parliamentary Inquiry into skilled migration would be good first steps to streamlining the required path for workers and companies. This must be complemented by continuing priority on boosting apprenticeship and training completions in areas of acute skills shortage.
Tax and regulation appeared less important in the scheme of government policy settings, with only 40 per cent of CFOs citing them as important or very important. This may reflect the highly favourable tax treatment of investment at the present time with accelerated depreciation schemes boosting investment plans.
But there is no room for complacency. Businesses will be watching upcoming budgets closely, waiting for the first evidence of fiscal repair, what form it will take and if it will impact them. The federal government must articulate a new medium-term fiscal framework to provide certainty of the goalposts driving future budgets. This is effectively outlining how it will walk the fiscal tightrope – continuing to support a robust economic recovery while keeping debt sustainable over the long-term.
Just as some people doubted the stunning alteration of Scrooge at the end of A Christmas Carol, many will doubt the latest sign of investment green shoots or the turnaround of a decade long trend. Doubt should be replaced by doing all we can to lock in a new decade of business investment.