Businesses slash capital plans, worry they can't pay their bills

The nation's businesses are slashing plans to spend on buildings, plant and equipment as up to a third worry they may be unable to pay their bills in coming months, prompting fears of a further hit to Australia's poor productivity levels.

As a Reserve Bank board member admitted the chances of a near-term lift in inflation and a fall in unemployment were "remote", data from the Australian Bureau of Statistics revealed private capital spending has slumped to its lowest level since before the global financial crisis.

Businesses have slashed their capital spending expectations in the wake of the coronavirus outbreak, prompting fears it will hurt the nation's long term productivity levels.Credit: Peter Rae

Capital expenditure dropped by 5.9 per cent in the June quarter, down to $26.1 billion. It has fallen 11.5 per cent over the past year, with capital spending already slipping before the advent of the coronavirus.

Over the past year, capital spending by firms in NSW has crashed by 20 per cent while in Victoria it is down by 18 per cent. Only WA, on the back of the state's iron ore miners, has defied the trend to be up by 8 per cent.

Businesses now expect to spend almost $99 billion on capital goods and buildings through 2020-21, an 11 per cent or $12 billion drop on what was spent last financial year.

A separate business survey by the ABS points to the depth of the planned spending cuts.

It found 23 per cent of businesses had either cut or cancelled their capital expenditure plans compared to three months ago, with uncertainty about the economy and forecast customer demand cited as key reasons.

Two in five firms said revenue had fallen over the past month while 22 per cent said their expenses had increased.

More than a third said they would face difficulties paying their bills over the next three months.

ANZ senior economist Catherine Birch said capital spending outside mining could plunge by almost a fifth this financial year.

Mining investment is likely to remain steady through 2020-21, delivering some support to the economy.Credit: Louie Douvis

Even with mining investment remaining steady, the overall drop in capital expenditure posed a long-term risk to the national economy's performance.

"Before the pandemic, we had already seen capital shallowing, and such a large contraction in 2020-21, adding to the 2019-20 fall, will restrain the economic recovery and further undermine productivity over an extended period," she said.

The capital spending data follows this week's construction work figures which showed a steep fall in residential housing work through the June quarter.

UBS senior economist George Tharenou said the figures suggested next week's June quarter national accounts were likely to be a little better than feared.

He said instead of a 7 per cent contraction through the period which both the Treasury and Reserve Bank have forecast, the economy probably shrank by 5 per cent.

The Reserve Bank board meets next week with official interest rates expected to remain anchored at 0.25 per cent.

Board member Ian Harper, in a public address on Thursday, admitted he had never thought the bank would be forced into taking unconventional policy decisions to help protect the economy.

He conceded it would take some time before the RBA would have to worry about an inflation threat to the nation.

"The board's decisions have been very much focused on the ... objective of securing the economic prosperity and welfare of the Australian people, given that the chances of meeting the bank's inflation target and the associated level of unemployment are remote in the near term," he said.

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