Investment to hit lowest level for 20 years

Private business investment is set to slump by 15 per cent this year amid record falls in confidence and rising unemployment.

 

Private business investment is set to slump by 15 per cent this year — hitting its lowest point as a share of the economy in almost two decades — amid record falls in confidence and rising unemployment.

The Deloitte Access Economics Investment Monitor, released on Monday, warns that the collapse in demand and confidence has caused businesses to consolidate their operations and “make savings where they can”.

The federal economic and fiscal update released by Josh Frydenberg last month forecast business investment to plunge 12.5 per cent and dwelling investment by 16 per cent across 2020-21.

Deloitte Access Economics partner Stephen Smith said the impact of COVID-19 was “likely to see an increase in the number of investment projects being cancelled or delayed” and fewer new projects announced.

With interest rates at record lows and unemployment reaching its highest levels in decades, Mr Smith said infrastructure costs were “lower than they were and the benefits are higher”.

“When the recovery starts, business investment will certainly play an important role. Investment drives growth in the economy, and without growth fewer jobs are created,” Mr Smith said.

“But the timing of the recovery remains highly uncertain, as does the question of whether conditions will get worse before they get better.

“The key here is the date at which production capacity starts to be threatened by rising sales, meaning there’s an improving business case to invest. That date will differ from industry to industry, and from business to business, but may still be some time away.”

Mr Smith said commercial construction would experience a slower recovery due to the “increased adoption of work-from-home arrangements and a smaller need for retail space because of the growth of e-commerce”.

At last month’s national cabinet meeting, state and territory leaders agreed to work with Scott Morrison to fast-track 15 major projects across Australia, creating $72bn in economic activity and supporting 66,000 jobs, and also to assist in streamlining environmental approval processes.

Mr Smith said when the COVID-19 outbreak was contained, government spending was expected to shift from welfare and the healthcare system to infrastructure investment projects.

“Enhanced co-operation between the federal and state and territory governments means that environmental approvals may take only one third of the time they usually do, and the aim is that the total assessment and approval process will be condensed from 3½ years to just under two years,” he said. “This is no small task.”

While Treasury predicts mining investment, supported by demand from China and sharp declines in production from Brazil, to grow by 9.5 per cent in 2020-21, the Deloitte report warns commodity prices are “expected to remain weak while global growth remains weak”.

“That suggests commodity prices will moderate through 2020 and much of 2021 before gradually recovering thereafter,” it says.

With the price of iron ore increasing from $US80 a tonne in late 2019 to more than $US100 in mid-2020, the report says that aside from several large iron ore projects in Western Australia, the “pipeline of work is modest”.