Budget review

There was precious little positive news in today’s official report on firms’ investment behaviour and spending intentions for the December quarter. There was another fall in spending in real terms last quarter – the fourth straight drop and the eighth decline in the last nine quarters - and firms’ spending intentions for the period ahead remain weak. One of the few silver linings on this otherwise dark cloud is that the expected decline in spending in the current fiscal year now is slightly smaller. That’s about it.

In the most recent quarter, total spending by firms in all sectors dipped another 2.1% q/q (more than economists had expected), after a 3.3% plunge in the September quarter. As had been expected, the decline was led by the miners, where spending dived more than 9% q/q, albeit as major projects are completed. Spending by firms outside mining actually increased last quarter, but modestly and off a low base. Measured another way, firms’ spending on buildings and structures fell 4% in Q4, as spending on plant and equipment was broadly flat.

More importantly, today’s report provided firm’s updated projections on investment spending in both the current fiscal year and for the year ended June 2018. This is the first glimpse of firms’ intentions for the next fiscal year, but the news is not good – they expect to trim spending another 12% in 2017-18, a similar-sized fall to that expected in the current fiscal year (down 11%, although the expected decline this year was 15% in the Q3 survey). If delivered, this will be the fifth straight year of declines.

Predictably, firms in mining expect a further dive in investment spending in 2017-18 (down nearly 30%), but spending in resources is coming off a record-high base and projects are moving into the production phase. The decline for firms in struggling manufacturing (down 9%) also is no surprise. The really bad news is that firms outside both mining and manufacturing also expect to trim spending next year, albeit by only 3%. On this evidence, the long awaited and much anticipated lift in investment spending remains elusive, even for firms outside mining.

Higher investment spending has been a prominent missing piece of the economy’s growth jigsaw for some years now, despite generally supportive conditions. Interest rates have been at record lows, business confidence has improved, and the global economy has strengthened. Moreover, most plant and equipment has a finite lifespan, so its replacement cannot be deferred indefinitely. Many firms, though, apparently remain very cautious on their investment spending plans, the much needed “animal spirits” apparently still in short supply.

Mining and non mining investment

Investment spending intentions