Slump in business investment shows the recession is far from over

The green shoots of economic recovery were trampled all over yesterday with the release of new data showing business investment plunged by a record 8.9% in the first three months of 2009.

It appears businesses have simply stopped cancelled investment and expansion plans in the face of falling consumer spending and rising unemployment.

Speeding on equipment, plant and machinery tumbling by 10.8%, the biggest quarterly fall since the survey began in 1987. Private non-residential construction activity fell by 6.3% with private engineering activity falling 6.1%.

“Businesses, responding to the global and domestic recession, are looking to cut costs – and that includes trimming investment spending, which climbed to high levels during the long upswing,” Westpac economist Andrew Hanlan said.

JP Morgan economist Stephen Walters said the sharp drop in business investment shows that the investment boom, which helped drive Australia’s economy growth in the last decade, is over.

“This has serious negative implications for the outlook for employment, which is driven by changes in investment spending, not changes in GDP.”

What worried Walters most was the downturn in business investment intentions over the next 12 months. While the ABS data showed businesses intend to keep spending at broadly the same level over 2009-10, Walters says the experience of the 1990s recession means this is likely to translate into a 19% fall in business investment of around 20%.

“In other words, firms are having second thoughts about extending the long investment boom – global demand for Australia’s exports has collapsed, and firms are finding it much more difficult to raise the necessary finance.

“Most of the downside appears to be in investment spending outside mining. The scaling back of investment plans in the latest survey fits more closely with industry data and anecdotes indicating that firms were cancelling expansion plans and firing staff.”

The collapse in business investment will place even more pressure on the Rudd Government’s stimulus packages and infrastructure spending plan to kick-start the economy and protect jobs. The Government’s decision to increase the small business tax allowance should also help stimulate some investment over the next six months.

The one potential upside in all this bad move is the increasingly likelihood that the RBA will cut interest rates in a bid to encourage businesses to reopen their wallets.

“While there is nothing ‘new’ in this week’s CAPEX survey and so no trigger for a rate cut next week, it does confirm the challenges facing the Australian economy in the second part of this year…this should be enough to see the RBA maintain an easing bias in the months ahead,” ANZ economist Katie Dean says.