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Productivity drag continues with capex budgets stalled

September 23, 2015

Record low interest rates should be conducive to investment, but continued economic uncertainty is causing SMEs to hold onto their cash and ultimately resulting in lower productivity, writes Robert Spano, Chief Executive Officer at Alleasing.

The Reserve Bank of Australia’s (RBA) cash rate now stands at a record low 2.0%, having remained at that level for the past four months. The decision to leave the rate unchanged at the most recent Board meeting was expected however, commentators are divided on whether further cuts will occur as the RBA seeks to balance house price inflation against sluggish domestic growth.

The flow on implication of this situation is that we are struggling as a nation to find the tipping point that will spur businesses to invest.

In recent weeks, Philip Lowe, deputy governor of the RBA, has reaffirmed the central bank’s commitment to boosting productivity and implored businesses to resurrect the economy via increased spending. His comments followed the release of the Australian Bureau of Statistics’ (ABS) June quarter capital expenditure (capex) data, which noted that estimate 3 for 2015-16 new plant and equipment capex is 23% lower than estimate 3 for the previous year.

Data from Alleasing’s Equipment Demand Index tells a similar story, with 73% of micro businesses and 58% of small firms indicating they 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.

This situation is occurring despite the current low rate environment, which is intended to spur investment, and at a time when six in 10 businesses are reporting detrimental impacts stemming from unproductive assets. And, it’s important to note that this figure has risen by 13% over the past 12 months.

Breaking the data down by segment reveals that three in four SMEs are suffering the productivity draining impacts of assets sweated past their useful life, as are a similar portion (73%) of micro businesses. But, while the numbers and detrimental impacts are significant, businesses continue to sit on their hands rather than addressing the issue. Fifty six percent of SMEs and 69% of micro firms have no intention of changing their asset base during the December 2015 quarter, while just one in four in both groups plan to acquire new equipment. In the 12 months we’ve been tracking the data, intentions have stayed largely the same, while interest rates have dropped by 50 basis points.

While disheartening, the results are not surprising as business confidence continues to be buffeted by a range of economic factors, including lower commodity prices, a slowing mining sector and an unstable China.

Continued political uncertainty and destabilisation have also been affecting confidence, but the change of leadership and announcement of the new cabinet appear to have given business an air of hope. There is an expectation that Prime Minister Turnbull will embrace new technologies, and accordingly there is a level of optimism that we can remove the reluctance to act on out-dated equipment and address the drag on productivity.

Obviously it’s too early to tell what impact the leadership change will have but early indications, including a bounce in the weekly ANZ-Roy Morgan confidence index, suggest that the nation supports the shift. The new Prime Minister has indicated that restoring business confidence is front and centre on his agenda, and certainly there is a myriad of data which explains why this is critical. Importantly however, we will all be waiting for a sound reform strategy and clear economic vision otherwise, the bounce will be just that, a bounce rather than a sustained improvement in confidence that will drive investment, growth and productivity improvements.

 

This article first appeared in the SMH, The Age, Canberra Times and Brisbane Times.

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