Business investment to plunge despite economic recovery

The economy might be in recovery, but Treasurer Wayne Swan and a number of business experts have warned business investment will remain at historic lows for at least the next 12 months.

The claims come as federal treasurer Wayne Swan announced this morning that private business investment is expected to be $42 billion lower over the next two years than it otherwise would have been if not for the financial crisis.

Dun & Bradstreet’s director of corporate affairs, Damian Karmelich, says business investment is still relatively low despite encouraging economic indicators.

“What’s interesting from our perspective is that capital expenditure expectations are at their highest level in nine quarters, but only 16% of businesses are expecting to increase spending. That is the highest level in nine quarters, and that’s still a very low number.”

“Other indicators are moving up, such as inventory levels which show businesses are investing in new stock. But over the course of the last year, people have stopped investing in their own businesses.”

Adrian Hart, senior manager of BIS Shrapnel’s Infrastructure and Mining Unit, says the mining industry will see 18 months of slow investment that will be indicative of the overall economy.

“It’s not going to pick up straight away. We’re talking about a downturn in mining investment over the next 12-18 months…and for other industries as well. Although the issues that caused the downturn are now gone…they have still had an impact on investment.”

The comments come as treasurer Wayne Swan said at an Australian Industry Group breakfast this morning that business investment is expected to be $42 billion lower as a result of the financial crisis. The figure covers the 2009-10 and 2010-11 financial years.

Swan used the opportunity to rally support for the Government’s infrastructure stimulus packages, saying private investment is still expected to record a 6.5% decline during 2009-10 – the biggest fall since the early 1990s.

”The Government’s investment will offset the weakness in private investment, helping to maintain total investment in the Australian economy as a share of the total economy,” Swan said.

”Abandoning the stimulus now would drive more businesses to the wall, it would leave many tens of thousands more Australians without jobs, and it would permanently damage our economy.”

He also said the Government expects export income to drop by $55 billion, or 19.5%, over the next two years, with company profits to fall by about 3.25%. Private final demand is also expected to fall by .75%, the first decline since the 1991 recession.

But Swan also thanked the business representatives present for what SMEs had done to shore up the economy, saying he acknowledged that the global financial crisis has “hit small business hard”.

“I thank you again for what you’ve done to help make Australia the best-performing of the advanced economies. What you’ve done to hold on to most of your workers. And what you’ve done to ensure we are well-positioned for recovery.”

“It’s the sort of commitment and leadership you have exhibited in recent months that we’re going to need if we’re to meet the big challenges on our horizon.”