Post-Covid business investment boom

Business investment will surge to a record $200bn next financial year as the private sector moves past the trauma of the Covid-19 recession.

Josh Frydenberg says the revitalised business investment outlook was further evidence of his government’s economic plan in action. Picture: Ian Currie

Business investment will surge to a record $200bn next financial year as the private sector moves past the trauma of the Covid-19 recession.

Next week’s mid-year budget update will predict a 16 per cent lift in business spending over the next two years, up from the 12 per cent predicted in the May budget.

It would be the fastest growth in investment since the height of the mining investment boom in 2011-12.

With the government moving to put the economy as the central focus of next year’s election campaign, Treasurer Josh Frydenberg declared the investment surge “comes off the back of unprecedented tax incentives” provided by the federal government.

“More investment means more jobs and that’s exactly what we are seeing right across the country,” he said.

Treasury now expects investment in the non-mining sector to increase 8.5 per cent in this financial year, followed by 8 per cent growth in the next, bringing total investment levels to the historic $200bn level in 2022-23.

This would lift investment in the non-mining sector as a share of the economy to 9.25 per cent and above the long-term average, Treasury says.

The supercharged investment performance is a welcome development after years of weak spending by businesses in response to a chronic lack of demand, and has been blamed in part for causing the nation’s poor productivity growth performance and soft wage outcomes since the end of the last commodity supercycle.

Post-Covid recovery in business spending is also notable for its speed versus previous downturns: non-mining investment was still 14 per cent below pre-crisis levels four years after the GFC.

Next Thursday’s mid-year economic and fiscal outlook (MYEFO) is expected to include a range of upgraded assumptions that should drive a greater-than-$8bn improvement in the federal government’s estimated bottom line for 2021-22, versus what was forecast on May 11.

Stronger than anticipated growth in jobs and corporate profits since the last budget is expected to underpin the improved fiscal outlook, despite the steep decline in activity during the September quarter, when the Delta outbreak forced lengthy lockdowns in NSW, Victoria and NSW.

An improving outlook, however, could still leave a massive $50bn deficit towards the middle of the decade, even if the 2021-22 underlying cash balance drops by as much as $30bn to $76bn, as CBA predicted this week.

The Delta blow to the economy, while substantial, proved less severe than expected, and next week’s labour force figures are expected to confirm another powerful jobs rebound.

Westpac chief economist Bill Evans this week said economic growth could reach an “eye-popping” 6.4 per cent in 2022, supercharged by an 8.5 per cent increase in business investment and a 9.5 per cent jump in consumption as households draw down on the $240bn in savings accumulated through the pandemic so far.

Mr Evans said in late 2019 he thought the economy would grow by 7.8 per cent over the coming three years. Based on Westpac’s latest forecasts, he said – and despite the pandemic – he now thought by the end of next year economic output would be 8.5 per cent larger, suggesting the economy will have grown more over this three-year period than had the pandemic not taken place.

Underpinning this extraordinary forecast was the $350bn in Covid-19 fiscal stimulus and the extraordinary level of monetary policy support, not least the drop in the RBA’s cash rate to a record low of 0.1 per cent.