Yesterday’s shocking private investment data from the Australian Bureau of Statistics will significantly complicate Joe Hockey’s revamp of the budget. Rather than a slash-and-burn attack on spending, the Treasurer and his advisers now have to grapple with an emerging investment drought, as well as the actual drought in eastern Australia.
Private capital expenditure fell 5.2% in the December quarter, the ABS reported, while the first estimate of 2014-15 capital expenditure expectations also fell by more than expected, to $124 billion.That was down 17.4% on the first estimate for the current financial year and well under market estimates of $139 million. That is the story that should have been on the front page of all the papers, especially the national dailies, because it is a far bigger story than Qantas (which is also cutting its capex by $1 billion over the next two years).
If we were a bit tabloid, we’d raise the prospect of a “capital strike”. But judging by the better-than-expected December half-year and annual corporate results and higher dividend payments, corporate Australia has decided to reward shareholders rather than invest the money to expand their businesses. It’s not so much a capital strike as a change in priorities.
That’s not necessarily all bad news for Hockey — the higher dividends will help the budget’s tax revenues. But it’s bad news for the economy, because policymakers for the last two years have been waiting to see what will replace the mining investment boom (which was never going to last) as a driver of growth. The Reserve Bank of Australia has dropped interest rates to very low levels (helped by former treasurer Wayne Swan’s success in keeping inflation down) in the hope of stimulating residential construction, with some of that flowing into new building but much of it into the great old Aussie game of rising home prices. That’s why Wednesday’s construction figures were bad news: in the December quarter, total construction work fell 1%, seasonably adjusted, with residential construction down 1.7%.
In its first Statement of Monetary Policy this year, the RBA acknowledged that the answer to the question of what will replace mining investment remained unresolved — though it could see some positive signs:
“Non-mining business investment remains subdued. While this is consistent with measures of business conditions and confidence having been below average over the past year, in the past few months these measures have improved noticeably. Some measures of business conditions have increased to be a little above average. However, at this point, surveys of investment intentions for non-mining investment remain subdued and liaison suggests that firms want to see a substantive improvement in demand conditions before committing to hiring new workers or increasing investment significantly.”
That’s now been confirmed — and probably more than the RBA would be comfortable with, even if capital expenditure forecasts can be quite volatile.
The capex figures led the ANZ to forecast an overall fall of 11% for 2014-15, much larger than the 0.5% fall forecast in the 2013-14 budget and 2% fall in the mid-year economic review in December. NAB senior economist Spiros Papadopoulos said the figures for the December quarter and the first estimate for the new financial meant investment growth was going to be negative for this financial year, and likely for the 2014-15 financial year as well.
They also raise the prospect of smaller-than-forecast December quarter growth when the GDP numbers are released next Wednesday. We know retail sales and exporters will have been the main drivers of economic growth in the fourth quarter. But there’s a chance that growth could dip close to zero because of the vagaries of some of the figures to come, such as government spending.
It wasn’t supposed to happen like this. The Coalition assumed that its election would release the animal spirits of consumers and business, which would welcome the removal of Labor. “I think companies will unleash their balance sheets, and I think consumers will as well if there is a change of government,” Hockey said before the election. But a weak employment market and a poor investment outlook — which Hockey can’t blame on Labor — means that the May budget will have to walk a fine line between long-term budget sustainability and avoiding exacerbating economic weakness by cutting spending too much — particularly when, as the RBA points out, we’re already facing “the weakest period of growth in public demand for at least 50 years” at the Commonwealth and state level.
Moreover, Hockey has made life more difficult for himself. His $8.8 billion gift to the Reserve Bank (the appropriation for it was introduced a fortnight ago and was debated this week) increases the budget deficit but will have no visible impact on public spending. That’s an ironic contrast with the Coalition’s criticism of Labor’s stimulus spending: the then-opposition and its media supporters would complain about “waste” in stimulus programs without acknowledging that it still meant money was flowing into the economy, preferring to let voters think that, somehow, wasted spending was being lost from the economy. But Hockey’s handout to Reserve Bank is exactly that — a massive hole in the budget that simply shuffles between Treasury and the RBA without creating any jobs or growth.
And Hockey’s decision to knock back the $2.2 billion mop-up bid for GrainCorp from US group ADM also robbed the budget of valuable capital gains tax revenue.
So Hockey has to find a way to redirect spending into, or borrow money for, infrastructure projects in the next 18 months to offset a negative investment environment while also putting in place some long-term curbs in spending. It’s possible — spending cuts that kick in across forward estimates rather than immediately, or even ones that ramp up beyond forward estimates, which Hockey’s new 10-year projections can illustrate, can put the budget on the path back to surplus without further undermining the economy. But after this week’s figures, Hockey’s fiscal task has been much more difficult given the private sector currently appears to be happier to reward shareholders than to invest in jobs and growth.