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FY16 business investment plans on hold

July 2, 2015

Despite the incentives for small businesses handed down in the Federal Budget, a lack of confidence continues to impact FY16 business investment plans, writes Robert Spano, Chief Executive Officer of Alleasing.

There has been a significant amount of chatter over recent weeks regarding the Federal Government’s small business budget package. While some small businesses may have rushed out and made a purchase to take advantage of the accelerated depreciation measures announced on May 12, others were intent to hang back and wait for the finer details to unfold.

Truth be told, only time will tell if it is to be the shot in the arm small businesses need to stimulate investment because the ink is barely dry on the Bill. But, while we are waiting for the next round of ABS capital expenditure data that will tell us whether businesses have hit the shops, our latest research provides mixed signals as to the investment intentions of our nation’s engine room in FY16.

The Alleasing Equipment Demand Index reveals that the majority of businesses intend to leave their capex budgets unchanged in the new financial year. In fact, 73% of micro businesses and 58% of small firms will not change their capex spend in FY16. A further 11% and 19% respectively, intend to reduce their capex budgets, with the average reduction at around 4-5% for both groups.

These intentions come at a time when we’ve seen a steady increase in the number of businesses detrimentally impacted by equipment that is overdue for replacement. For micro firms, we’ve seen a rise of close to 10% across four rounds of research, while for small businesses the rise has been slightly lower at 7%. This means we now have 71% of micro firms and 73% of small businesses indicating their operation is suffering because of assets that have been pushed beyond their useful life.

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……we are caught in a negative productivity and investment cycle.

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.

The primary drivers for those businesses that intend to decrease their capital expenditure in FY16 are no surprise. Confidence in the economy (80%), confidence in their own operation (69%) and project based decisions (23%) and the three highest ranking responses. Certainly the confidence issue is consistent with other business surveys, as well as Reserve Bank of Australia (RBA) and Australian Bureau of Statistics (ABS) data.

The RBA’s business liaison program has highlighted the hesitance of businesses to undertake new investment until demand conditions improve considerably. Further, the most recent ABS capital expenditure data shows that estimate 2 for FY16 expected expenditure is 25% below estimate 2 for the prior year.

Perhaps even more disheartening is that the businesses intending to decrease their capex are doing so despite believing it will have a negative impact on their operation. Six in ten said their revenue will decline as a consequence of the reduced capex spend. This detrimental impact came in ahead of losing project opportunities and a decline in profitability.

Thankfully it isn’t all doom and gloom. There is a segment of the small and micro business community that has the foresight to look beyond the here and now and invest for the future.

Sixteen per cent of micro firms and 23% of small businesses will increase their capex budget in FY16. This is a larger percentage than that intending to reduce spend and, the average anticipated increase is greater, at 5% for micro firms and 7% for small businesses.

While we would like these numbers to be much higher, this is the group we need to keep an eye on. The momentum they gain could be the catalyst that will encourage our nation’s engine room to climb out of the mud, put their foot on the accelerator and start investing in their operation.

Certainly this is the response policy makers and the business community are hoping for. But, as I noted at the outset, only time will tell….

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