Business reluctance to invest damaging, says Philip Lowe

Business investment slumped over the three months to September, despite booming consumption growth and a surge in company profits.

Reserve Bank of Australia governor Philip Lowe in Canberra on Wednesday. Picture: Gary Ramage

Business investment slumped over the three months to September, despite booming consumption growth and a surge in company profits, as Reserve Bank governor Philip Lowe warned of “persistent damage” to the nation’s economic potential as firms hold back on reinvestin­g in their operations.

National accounts figures released on Wednesday revealed the nation roared out of the COVID-­19 recession over the September quarter, but showed businesses remained unwilling to invest ahead of a recovery Josh Frydenberg describe­d as “long, hard and bumpy”.

Business investment dropped by 4.1 per cent, dragging 0.5 percentage points from economic growth through the quarter, the Australian Bureau of Statistics ­figures showed. The slump came ­despite a 3.2 per cent jump in company profits, which brought the year-on-year lift to 18.6 per cent as government stimulus measures filled corporate coffers.

New non-mining sector spending fell 3.7 per cent, down a massive 13 per cent over the year to September, while mining investment fell by 5.2 per recent, as the annual growth rate slowed to 4.5 per cent.

In its October 6 budget, the Morrison government announced a measure that would allow ­companies with annual turnover of up to $5bn to claim in full expenses­ out to June 2022, and the Treasurer said this incentive was “not reflected in the September quarter and we’re very hopeful that will help encourage more ­investment in the mining sector and, of course, in the non-mining sector”.

Mr Frydenberg pointed on Wednesday to an ABS survey of businesses conducted after the budget, showing a “significant” 5.8 per cent increase in investment plans for this financial year versus three months earlier, although the survey showed firms still expected to spend as much as 10 per cent less in this financial year than the last.

Declining business investment outside the resources sector was a feature of the Australian economy before the coronavirus recession, with September the fourth consec­utive quarter of declining non-mining expenditure.

GRAPHIC: Economic snapshot

The Reserve Bank governor warned on Wednesday morning that the collapse in investment through the COVID-19 recession would deal a long-term blow to the nation’s productive capacity.

Dr Lowe said that a lower level of investment would leave the economy “persistently” smaller than it would have otherwise been without the health crisis.

“It’s quite plausible that there is persistent damage (to the economy) because the level of investment is quite a lot lower than it was going to be,” he told a parliament­ary committee.

“Lower levels of investment mean lower capital stock, and lower capital stock means less output.

“So to get back to that previous trend, we’ve got to get the level of investment up a long way, which doesn’t look likely any time soon.”

Business Council of Australia chief executive Jennifer Westacott said the bounce in growth over the quarter was “great news for the country” but warned that “we are not out of the woods yet”.

Ms Westacott, who called last week for the company tax rate to be lowered, said business investment “remains stubbornly low”.

“To reverse it we need to make it easier to do business, including having the certainty to get new projects off the ground,” Ms Westacott said. “Only through sustained private­ sector investment will we see new jobs created and sustained growth.”