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Economic and Financial Market Update: Investing For The Future

28 May 2021

Summary:

The strong economy has boosted business confidence;
Confident firms means more investment;
This comes after a period of weak capex spending, at least partially reflecting the end of the mining boom;
Investment boosts the economy in both the short- and long-term.

Go back a year and the consensus view was that the economic impact of the virus would be short. But it looks increasingly likely that any ‘scarring’ to the economy will be barely visible. The economy has roared back to life spurred on by very low interest rates and big budget deficits. Firms’ say they have not seen conditions like these for at least twenty years. Business investment is picking up powered by higher-than-expected capacity use and significant government incentives.

Firms are not only saying that they will invest more, they already are. Capex in the March quarter 2021 rose by over 6%. Spending on plant and equipment rose notably.

Concern about a lack of business investment was an issue well before COVID. Back then low capex spending was put down to an uncertain economic environment. But the other important factor reason was the end of the mining boom.

Investment spending is expected to rise strongly next year. A recent ABS survey suggested that firms might increase their investment spending by 15% next year, with particularly large rises in some of the services (including accommodation) and retail sectors.

There are economic benefits in the short term from more capex spending. And in the long term productivity growth needs stronger investment growth. Governments’ have significantly boosted budgeted infrastructure spending (although there has yet to be the same boost to actual spending). This is all good news. But sustained strong economic growth will require widespread immunity to the virus. In the long term stronger population growth will also be important.