I wasn’t panicking about the Australian economy … until I saw this graph

This graph makes my tummy turn into a knot.

capex

[Source: ABS]

It shows how much money business in Australia expects to invest. Businesses invest in new trucks, new computers, new buildings, etc. Investment is what makes businesses grow, what makes the economy grow.

The white columns are spending plans, the grey columns are cold reality. Looking at those last two small white columns,  we see business is terrified.

They show how much money businesses expect to invest in 12 months from July 1 2015. It’s low. Very low. The worst since 2010-11.

We can expect the plans for investment (the white columns) to grow a bit as the year continues, same as in every other year. The third estimate of plans for investment (third white column) is often the biggest. Reality (the grey column) rarely beats that third estimate. This year’s final business investment number hasn’t come in yet (there’s no grey column seven yet in 2014-15) but it looks likely to be the lowest since 2010-11.

And next year’s business investment looks like it will be worse.

WHAT IT MEANS

Low business investment means low economic growth. Low economic growth means higher unemployment.  Higher unemployment means more human suffering. (Why do we need high growth to keep people in work? This is something I wish I understood better about economics.)

The information in the graph comes from a survey the ABS does. The survey happened in April and May, so it would have caught some (but not all) of the Budget leaks about the supposed small business bonanza. Of course we will have more information about the effect of the Budget next month.

But for now, it looks like Hockey’s second Budget is a dud.

Partly, the problem is mining. The end of the mining boom is as sudden as the start, and the cash rivers flowing to projects in WA and QLD are drying up fast.

But the real problem is that other industries are not picking up the slack. Here’s the graph for selected industries excluding both mining and manufacturing. The pattern is the same. Estimate two for next year is 10 per cent less than estimate two for this year. That spells trouble.

capex selected

What can we do?

The federal government should spend more to give the economy more of a boost. They know that and Hockey has been blaming the Victorian government for cancelling the east-west road project.

But given the sacred status of surpluses, there’s little more we can expect from fiscal policy.

Instead, all eyes turn to the RBA. Will it try yet more monetary policy to keep the economy moving? Will it cut interest rates yet again?

Some people think yes. In some ways, there’s nothing else we can do. Even though the RBA has already cut rates to record lows and house prices have gone crazy. So long as inflation is modest next time CPI comes out, another rate cut is very plausible.

But will it work to make those white columns go up? To ultimately make businesses plan to grow and hire more people? To keep people in jobs and prevent the suffering of joblessness? I fear not.

Published by

thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

4 thoughts on “I wasn’t panicking about the Australian economy … until I saw this graph”

  1. I am no economist but,businesses that have purchased in the last few years need to bed down these investments and start receiving a financial return for those purchases.
    Why does low investment=low growth?.It may reduce your competitove advantage but not stop making $$.You could use those $$ to employ more staff. Create more tax $ for the economy,purchase a
    new car for the family or drop it into super for them to invest.
    The main reason we need high growth is to keep incomes rising a such high
    rates.How many of these readers ever
    thought the would be earning what we earn today.If you could ask your parents how does my income compare to what you earnt at my age i wonder the answer.In the end $50 today is the same as $50 of hard work then.It just won’t go as far but the parents still have to use that $50 to the best of their ability.

    Like

    1. Any individual business needs to have time to invest and time to bed things down. But economy-wide, you expect business to be investing every year.

      For example, Bunnings opens more stores every year. Half its profit growth comes from selling more at the same stores, half from opening new ones. When a business like Bunnings is opening no new stores,or very few new stores, it means the economy will be not much bigger this year than last year. That’s what we call low growth.

      A business still makes money, for sure. But an economy where everyone makes the same amount of money this year as last year (0 per cent growth) causes higher unemployment. That’s why we want businesses to strive to be bigger.

      Like

  2. Looking at Japan as well as some other countries monetary policy is not working very well. I’m with you. Govt spending needs occur at a level to encourage business investment in projects that are genuinely useful. Not just in areas that they need to sure up votes. Also a strong middle class is important to help drive demand which I guess does help business to invest. I know a lot of business owners, most of them are not putting themselves on the block at the moment due to poor sales growth if any.

    Liked by 1 person

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