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Capital expenditure budgets stalled as confidence remains subdued

July 1, 2015

Capital expenditure (capex) budgets for the new financial year are being impacted by a lack of confidence in the economy. Seven in ten firms will leave their budget unchanged and a further one in ten will decrease spend in FY16, with an average intended reduction of 5%.

These are some of the findings from the latest Alleasing Equipment Demand Index, and they come despite six in ten firms being detrimentally impacted by a back-log of unproductive equipment. This figure has risen steadily over four rounds of research, up 6% over that period. For smaller businesses (micro firms and SMEs) the rise has been greater at 10% and 7% respectively. Seventy one per cent of micro firms and 73% of SMEs are indicating their operation is suffering because of unproductive assets.

Mining and agriculture are the most pessimistic about their capex budgets, with 20% and 17% of firms respectively intending to reduce business investment in FY16. The negative capex outlook for the mining sector is set to impact firms based in Western Australia more than their Queensland counterparts. Twenty four per cent of West Australian based businesses plan to decrease their capex budget, while 14.5% of Queensland-based enterprises have the same intention.

These findings align with the most recent Australian Bureau of Statistics (ABS) capital expenditure data, which shows that estimate 2 for FY16 expected expenditure is 25% below the prior year.

While a lack of confidence in the economy is the primary driver behind reduced capex budgets, project based assessments are behind almost a quarter of decisions. This has obvious implications for the mining and resources sector, where 23% enterprises believe changes to their capex budget will impact revenue growth. At a national level, six in ten firms said a decreasing capex budget would impact revenue.

According to Robert Spano, Alleasing’s CEO, we are struggling to break through the negative productivity and investment cycle.

“The productivity challenges facing developed nations, of which we are one, continue to be a focus for policy makers, business leaders and the media, and we all understand why,” said Mr Spano.

“Our economy continues to tick along at below trend growth levels so executives are bunkered down, focussing on capital preservation. The unfortunate consequence however, is that the detrimental impacts on a business and its people only continue to escalate, as do the potential long-term impacts.

“Regardless of the low interest rate environment, businesses are not willing to invest until they see a considerable improvement in demand conditions. This is further evidence that a shift in business confidence is needed to support economic growth.”

Industries most affected by a build-up of unproductive assets include media (83%), agriculture (76%) and mining (73%).  In addition, almost three quarters of micro businesses and SMEs are using out-dated plant and equipment, the number drops to 33% for corporates.

“Given the significant proportion of firms being negatively impacted by unproductive assets and the fact that new business investment has been largely unresponsive to lower interest rates, configuring a capex policy that deals appropriately with existing and new asset requirements needs to be a key focus for Australian firms,” said Mr Spano.

“Failure to address this critical issue will leave Australian companies and the economy at risk of serious productivity issues.”

Despite the overwhelmingly large proportion of firms leaving capex budgets unchanged or planning to reduce them, there is a small pocket (two in ten) of businesses looking to increase their investment in FY16. Of the businesses that are willing to increase spend, the energy and media sectors are most bullish, both at 25%. The average planned increase across the board is 7%. Greater revenue growth (54%) is the primary motivator for this group, followed by expanding outright profitability (15%).

ENDS

Further information:
Danielle Woods
02 9850 5109 | 0401 140 124 | danielle.woods@alleasing.com.au

About the Alleasing Equipment Demand Index

The Alleasing Equipment Demand Index is a quarterly index, which examines the current asset inventory of Australian businesses, as well as expectations for future investment. The inaugural index was run during July and August 2014. Each quarter  ~1,200 Australian businesses that turn over $1-$100M are surveyed. These businesses have been broken into three segments: micro business ($1-5M annual turnover), SME ($5-20M annual turnover) and lower corporate ($20-100M annual turnover). The index is executed by East & Partners on behalf of Alleasing.

Alleasing is a leading, independent provider of asset finance and leasing solutions. We have financed billions of dollars of assets for businesses in Australia and New Zealand during our 25 years of operation.

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