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Economic and Financial Market Update: Investing for the future

09 December 2021

Summary:

Business investment is on track to rise strongly in Australia this year;
That is good news as it will boost productivity growth;
Part of the reason for stronger business investment is cyclical;
But there has been a sustained strong rise in spending on digitisation that is likely to continue in coming years.

Typically weak economic growth would see firms’ take a seat on the sidelines. But this time things really are different. Firms are looking to substantially increase the size of their capex budgets. Spending on building and structures could be strong. But budgets for equipment purchases are expected to be even stronger.

Stronger business investment is unambiguously a good thing. Total investment in the economy (as a proportion of GDP) has been trending down over recent years, one of the causes of slowing productivity growth. The decline of investment has mainly reflected weaker capex spending by firms’. This has been partially offset by stronger Government investment on infrastructure and defence spending.

One area where business investment has been consistently strong over recent years has been on IT. Spending on ‘hardware’ (computers) has generally been trending up although there was a period when it declined (relative to GDP) a reflection of the weaker economic outlook and the fall in capex spending more generally. But there has been a sustained strong trend rise in spending on software (‘digitisation’), one that has been impervious to cyclical movements in the economy.

The trend rise in software spending (and IT more generally) has a lot further to run. Software spending in the US is twice as big (relative to the size of GDP) as it is in Australia. Another reason is that the rate of online spending in Australia is less than half of what is spent in China and the UK.

A lot of the digitisation focus to date has been about online becoming another distribution channel. But there are significant productivity gains to be made by digitising the ‘Back Office’. For example, about one half of firms have no automated IT links. While about one-third have automatic links for invoicing or payments, less than one fifth have automatic links to suppliers or their logistics.