Record low interest rates are failing to kick-start business investment, with just one in four businesses set to increase their asset base during the December quarter, a figure that has remained largely unchanged over five rounds of research.
These are just two of the findings from the latest Alleasing Equipment Demand Index, which examines the current asset inventory of Australian businesses as well as expectations for future investment. The research reveals that six in 10 businesses are suffering the productivity draining impacts of assets sweated past their useful life, a rise of 13% over the past 12 months.
Three in four micro businesses and SMEs are being negatively impacted by unproductive equipment, while one in three corporate firms report the same. For SMEs, an increase in capex is made challenging due to cash flow constraints, whereas corporates flagged the need for tax reform as the most pressing factor preventing greater capex spend.
On a sector basis, media and telecommunications is the most adversely impacted by assets overdue for replacement at 90%, followed by agriculture (81%) and mining (80%). By contrast, the transport, wholesale and finance industries are the least affected, with only one in two reporting negative impacts.
Interestingly, 58% of all businesses reported a need to reduce working capital constraints before they would move to replace their unproductive assets, providing further evidence the low interest rate environment is having no bearing on business investment.
The results come less than a week after the Reserve Bank of Australia’s deputy governor reaffirmed its commitment to improving productivity and called on Australian businesses to boost spending to resurrect the economy. They also follow the release of Australian Bureau of Statistics June quarter 2015 capital expenditure data, which noted that estimate 3 for 2015-16 new capital expenditure is 23% lower than estimate 3 for the prior year.
Alleasing Chief Executive Officer, Robert Spano, said: “The results of the Index paint a clear picture of the roadblocks preventing Australian businesses from upgrading their assets, whether this is difficultly accessing capital or tax reform. The research also provides further evidence that the low interest rate climate is not a sufficient catalyst to drive the productivity improvements and investment we need to re-ignite the economy.
“Businesses remain uncertain about the implications of the economy’s structural shift away from mining-led investment and growth, along with instability and subdued demand from China and a weakened dollar.
“The broader economic context is combining with micro-level factors to impact confidence and keep capex budgets stagnant, with the ultimate consequence being a negative impact on the nation’s productivity and growth.”
To overcome the barriers to furthering their capital investment, one in three SMEs plan to develop new products and services, while one in four will add further equity to their business. The same two options are top of the list for corporates.
The research reports a more positive story in terms of equipment sourcing, which has firmly swung towards local suppliers, increasing from 64% a year ago to 84%. The number of businesses intending to source new and replacement assets from overseas has halved from as high as 19% 12 months ago, a direct result of a lower Australian dollar against the cost of overseas goods.
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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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