Bullish business is investing – and it’s not just tradies buying utes

Businesses with stimulus-fuelled balance sheets are responding to strong consumer demand and federal government tax incentives to buy plant, equipment and vehicles.

John KehoeEconomics editor
The most positive development in Australia’s economic rebound revealed in the latest national accounts is that the rapid recovery in employment and consumer spending is now being complemented by stronger business investment.

Businesses with stimulus-fuelled balance sheets are responding to consumer demand and federal government tax incentives to buy machinery, equipment and vehicles.

Business investment is not just being driven by tradies buying utes.  

Business investment rose 4 per cent in the March quarter, the first back-to-back quarterly rise since 2013.

Machinery and equipment investment recorded its strongest quarterly rise since December 2009, up 11.6 per cent, reflected in the mining and non-mining sectors.

The government’s instant tax write-off for assets worth up to $150,000 and for businesses with aggregated turnover of less than $500 million is not just encouraging tradies to buy utes.

The tax break is stimulating investment in farm equipment, conveyor belts and forklifts.

“A much needed and hoped for upswing in capex appears to be under way,” says Su-Lin Ong, a Sydney-based economist at Royal Bank of Canada.

Recovery from weak investment

Not only are increasingly confident firms pulling forward capital expenditure in response to time-limited investment tax breaks, there is growing evidence that they are adding new investment that wasn’t previously planned.

This is good news because until recently business investment had lagged other countries such as the United States, both before and after COVID-19 struck.

Business investment collapsed last year, as confidence plunged and firms reacted to weak consumer demand and heightened uncertainty.

But as health restrictions are generally eased – with the exception of short, sharp lockdowns – and consumer spending ramps up, bullish businesses are committing to capital expenditure.

Business order books are strong and sentiment is buoyant, National Australia Bank’s survey shows.

The Reserve Bank of Australia has noted that conditions are in place for a long-awaited recovery in business investment.

Strong business sentiment, low interest rates, high commodity prices and
tax incentives are conducive for business investment to recover.

To be sure, non-mining business investment still has a long way to go.

Pre-COVID-19 business investment fell to almost as low a share of the economy as it did during the early 1990s recession.

But as RBA head of economic analysis Brad Jones said on Wednesday, Australian business balance sheets are in better shape than past recessions and, incredibly, better than before the pandemic. So, too, are household balance sheets.

Investment in machinery and equipment is rising. 

This is because the unprecedented $250 billion federal government stimulus was overwhelmingly deployed in cash transfers to businesses and households, via programs such as the $90 billion JobKeeper wage subsidy, cash flow payments and business tax breaks. Bank loan repayment deferrals and rent holidays also helped.

As a consequence and very unusually during a recession, corporate profits rose almost 10 per cent last year.

No other advanced economy, except for the US, recorded a rise in business profits in 2020.

“One implication is that it is possible many Australian households and businesses feel more financially secure than is typically the case after a severe shock,” Jones says.

“It has been encouraging to see consumer and business confidence bounce back strongly, and fewer Australian firms report that economic uncertainty is affecting investment plans compared to earlier in the pandemic.”

To be sure, the budget forecasts business investment to shrink 5 per cent in the year to June 30, 2021, and rise only 1.5 per cent in 2021-22, before jumping 10 per cent in 2022-23.

But the stronger than anticipated business investment in the March quarter could mean an upside surprise is looming on capital expenditure.

Positively for the business investment outlook, temporary full expensing for eligible depreciating assets for businesses with an aggregated turnover under $5 billion was extended until June 2023, as part of a $20.7 billion business tax support package in the May budget.

Policymakers had worried about a looming hole in business investment, but the budget extension reduces that risk.

(The instant asset write-off for smaller items expires on June 30 2021).

“We expect further robust growth in capex in coming quarters, helped by the improving economic outlook as well as the government’s cash flow incentives to business spending,” says Morgan Stanley economist Chris Read.