While business investment as a share of the economy peaked back in 2012, Australia has still managed to achieve a decent rate of economic growth despite the fact that in every year since then business investment has been falling (both as a share of GDP and in dollar terms).
A tracking of major project activity suggests that 2017 will be the fifth consecutive year of contracting business investment. However, with the completion of the surge in mining projects nearly worked through, 2017 may be the last year of this trend.
Where do we go from here? Well that depends on business’ appetite for new investment. And on that front, there are some green shoots.
The recent Veda December quarterly business credit demand index released by Veda saw applications rise by an annual rate of 4.0%, comfortably above the 2.2% average growth seen over the last three years. So it would appear that the likes of the lower Australian dollar, continued low interest rates and strong external demand are creating favourable business conditions, and leading to opportunities for expansion.
At the state level, Victoria (6.8%) and the ACT (6.1%) led the way, both reporting impressive growth in business credit applications, while the back end of the mining boom continued to batter WA and the NT. Increased tourism activity supported by a reasonably priced Australian dollar and good income growth in key markets helped to bolster Queensland, which saw some modest growth in credit applications.
Supporting the strong growth in business loan applications, Veda reports in December that annual commercial mortgage application growth was 22.5%, a very strong result on the back of continued property investment from local and foreign investors.
Reserve Bank of Australia (RBA) business credit data also paints a picture of more recent recovery, albeit after a dip in the rate of credit growth through 2016. According to the RBA, business credit is now rising at an annual rate of 5.6%, ending 2016 well by climbing 1.1% over the month of December.
The chart below shows that the annual rate of business credit growth is now rising, and with recent strong monthly data, may rise further in the months ahead. While still significantly below the double digit growth rates recorded pre-GFC, the recent data shows promising signs about the business outlook.
Overall, improving operating conditions and sustained record low costs of borrowing for Australian businesses are key supports for business lending and investment.
Uncertainty about the economic environment still remains very high, but as Deloitte’s recent CFO Sentiment report suggests, businesses are still facing this uncertainty with a degree of confidence.
David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.