Remember the glee of business after the Coalition’s unexpected election win last May? Business leaders claimed that Morrison’s re-election would open the investment floodgates.
“A dose of confidence from a forward-looking and pro-business government will be a big factor in driving economic growth and prosperity,” business luminary Richard Goyder claimed.
The NSW Business Chamber said the win would restore confidence and business “will now move forward with investing in their business capabilities”. The Australian cheered a post-election sharemarket surge. Columnists agreed — business could now invest with confidence and certainty.
Except that never happened, and the Reserve Bank is worried about it, as the minutes from the February RBA board meeting reveal.
“Despite accommodative funding conditions for large businesses, growth in business debt had slowed over the six months to December,” the minutes noted. And business lending grew just 2.5% in 2019, the slowest annual rate since January 2014.
Business investment declined in the September quarter, with both mining and non-mining investment weaker than expected as at November. Mining investment had been considerably lower because work on new liquefied natural gas plants had continued to wind down. Information from business liaison contacts and the recent ABS capital expenditure survey continued to support the view that mining investment was passing through a trough.
There’s no significant recovery in sight. The minutes point out: “non-mining investment was expected to be subdued in the near term, but then to increase modestly, consistent with the expected pick-up in domestic activity”.
It’s not just that investment is low; it’s low when business is enjoying positive conditions.
Corporate financing conditions had generally remained favourable, including in Australia. Credit spreads were at low levels and global equity prices had been higher over recent months, notwithstanding the volatility associated with the coronavirus outbreak. Members noted that equity market valuations were high relative to earnings in a number of economies, which could be explained partly by low long-term bond yields keeping overall discount rates low relative to history.
This will have inevitable consequences for productivity growth, already at its weakest in decades. As Labor’s Andrew Leigh pointed out in a speech last week on the stagnation of the economy, the lack of investment has led to the economy facing the unusual problem of “capital shallowing”, when the amount of capital per worker falls rather than increases.
The January jobs figures, also released last week, suggest the investment slump has come just as the strong jobs growth that Malcolm Turnbull (and Scott Morrison as Treasurer) achieved has petered out.
Employment growth in the year to January was 2% in trend terms, right on the long-term average, ending a long period of above-average growth. Overall, unemployment remained at 5.2%, after the ABS revised the December rate upward. Seasonally adjusted, unemployment leapt from 5.1% to 5.3%, and fell below the long-run average in annual growth terms.
Underemployment also jumped 0.3 percentage points seasonally adjusted, and hours worked fell slightly. It’s true the economy was hammered by bushfires in January, but at that stage the tourism and education sectors had yet to see the full impacts of coronavirus.
The government’s policy stasis has worsened to the investment drought. It has refused business and Reserve Bank pleas for any economic stimulus, including Labor’s proposal for a depreciation tax break that would encourage new business investment.
The government has been hinting in recent months it will adopt some form of Labor’s policy, but business will have to wait until the budget in May.
There are other factors beyond the government, though. Australia isn’t alone: the US is witnessing a major business investment slump (so much for Trump’s tax cuts); and the Brits have their own Brexit-related slump. Wage stagnation — caused by business itself — deters investment because consumers aren’t spending. Plus, there’s growing evidence that industry consolidation and the creation of giant companies that dominate markets isn’t just bad for consumers but stifles investment and innovation, something Leigh has been talking about for some time.
And don’t rule out the deadening hand of superannuation fund managers. As we pointed out a couple of years ago, there’s hard evidence that the steady growth of our national savings pool has been accompanied by a decline in the efficiency of capital formation, and especially the tendency of risk-averse fund managers to simply chase existing assets like shares, rather than undertake new investment, and pressure companies to do likewise.
Boards and senior managers run scared, especially of large funds that increasingly dominate Australian capitalism. Either way, that confidence we were told was overflowing last May suddenly appears thin on the ground.