Weekly economic briefing: Business investment: finally turning the corner?

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Account of the National Accounts

Last week’s National Accounts release showed that the Australian economy finished 2017 in somewhat unexciting fashion, with real GDP lifting only 0.4% from the previous quarter and 2.4% from 12 months earlier. It was a solid growth result, but not at the leading edge for developed country growth, which is where Australia’s economy should sit. It’s also a more benign result than the stunning jobs growth of over 400,000 seen last year.

Household consumption was strong, while business investment fell slightly and net exports were very weak. Dwelling investment fell, with a large profile of activity – previously induced by low interest rates – having peaked a couple of quarters ago. Yet, other than the fall in dwelling investment, none of these look like they will become ongoing features of Australia’s growth story: it’s likely that business investment and net exports will contribute solidly to growth in 2018 (the latter boosted by rising LNG production capacity), while household consumption will continue to face the headwinds of weak income growth and a slowing property market.

Outlook for Business Investment

While not very apparent from last week’s National Accounts release, there are increasing signs elsewhere that, after four years of declines (the last peak being in 2012-13), business investment is finally turning the corner.

The National Accounts showed that underlying business investment fell 1.0% in the quarter. Data published earlier in the week revealed that mining capex (broadly covering gas and oil) drove much of this as three large gas projects – Wheatstone, Inpex and Prelude – scaled back their investment activity.

But there is now greater momentum in non-mining business investment. According to the ABS Private Capex Survey – which captures around 60% of total business investment – non-mining investment rose by 1.8% in the December quarter. And compared to the same period 12 months earlier, there was a 4.0% rise in total new capital expenditure over the year.

Businesses are also looking to lift their spending over the coming year. The capex survey suggests that business investment will be about 2.5% higher this financial year (see chart). That isn’t a lot, but it’s a step in the right direction. And similarly, the first estimate of private sector capex in 2018-19 is $84 billion, some 3.5% higher than 12 months ago.


Chart: Private capital expenditure – actual and expected

Source: ABS Private Capital Expenditure survey


Within this expected 2018-19 profile, mining capex is expected to fall $1.4 billion, but larger non-mining gains are expected (up $4.2 billion), led by telecommunications and utilities, as well as non-residential building investment.

The recently released Deloitte CFO Sentiment report helps explain the turnaround. Of CFOs surveyed, 71% were optimistic about the domestic and global economic outlook, and a record number said they were willing to take on more balance sheet risk.

The latest NAB Monthly Business Survey also points to businesses enjoying the strongest conditions since before the global financial crisis, with businesses’ capacity utilisation elevated. So far, businesses have mainly been addressing this through the less risky option of hiring more workers (hence the 400,000 jobs growth over 2017), but they now seem increasingly willing to commit capital.

For more information on the Australian brief, please contact co-authors David Rumbens and Alex Scaife.


UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Money for Nothing

  • In the aftermath of the financial crisis poverty, inequality and social inclusion have become high profile issues. To its adherents, and there are many, the solution is for the state to provide adults with a Universal Basic Income (UBI) to cover their basic needs, allowing them to earn whatever they wanted in addition. Implementing a UBI would represent a profound change in the role of the government and its effect on peoples’ lives.
  • The origins of today’s UBI go back at least 500 years. Sir Thomas More mused on the concept in his book Utopia 1516. More’s fictional utopia was an island state where citizens were ruled by benign scholars. Providing an income to all citizens would, More believed, reduce the incentive for crime and promote harmony.
  • In recent years, the idea of a basic income has drawn support from many quarters. For some on the left it offers a response to poverty and inequality. As a universal benefit, it could supplant means-tested or conditional benefits, which some see as demeaning. Free market supporters see basic income as a means to promote liberty and, by replacing existing welfare systems, shrink the state. And there are some, including Facebook billionaire Chris Hughes, who argue that a basic income will be needed to counter mass unemployment created by job-destroying new technologies.
  • Rutger Bregman, author of Utopia of Realists, and a leading advocate of UBI, says it, “is all about the freedom to say no. That’s a privilege for the rich right now. With a basic income, you can say no to a job you don’t want to do. You can say no to a city in which you no longer want to live. You can say no to an employer who harasses you at work…that’s what real freedom looks like” (Financial Times weekend magazine, March 10/11th 2018).
  • Different advocates of UBI imagine very different types of schemes. Here we focus on the shared characteristics of all UBI schemes.
  • Most supporters think a basic income would strengthen the bargaining power of labour, pushing employers to create higher-paid, higher-skilled jobs. It could radically simplify the welfare system and eliminate the disincentives to work inherent in means-tested benefits. (As earnings rise means-tested benefits are withdrawn, often creating punitive effective ‘withdrawal’ rates).
  • Basic income has attracted widespread and practical interest. Trials are underway in Finland, Canada, California, the Netherlands, Uganda and Brazil. Scotland is running experiments in four council areas and the Indian government is reported to be considering trials.
  • But if UBI is a good idea that has been around for so long why has no country ever adopted one?
  • There are fundamental problems. A UBI goes to everyone, not just lower income households, or those with special needs. It could be hugely expensive. In its purest form, as a replacement for means-tested benefits, a basic income would be unable to direct extra support to those in greatest need. This would exacerbate poverty.
  • As the Organisation for Economic Development (OECD) has concluded, “A universal basic income paid at a flat rate to all citizens would fail to reduce poverty levels in advanced economies and require substantially higher taxes to fund its simplicity…Large tax-revenue changes are needed to finance a basic income at meaningful levels”. For the UK, the OECD estimates that a UBI could cost as much as £44.3 billion, equivalent to the defence budget every year.
  • A flat rate UBI would, the OECD says, create “many gainers and losers…under a basic income less clearly targeted on poor families, poverty levels would rise in the UK, France and Finland and would be unchanged in Italy — the four countries studied in detail in the report.”
  • There are concerns that a UBI could erode incentives to work and to save. Critics also worry that UBI ignores the non-financial value of work, bringing purpose, status, relationships and structure to peoples’ lives. Would we really be happier not working?
  • Rolling out a UBI over an entire nation would be a mammoth task. In the UK, the history of far more modest projects, from the computerisation of NHS records to the implementation of the Universal Credit, is not encouraging. The Institute of Government has described Universal Credit as, “essentially a good, if highly ambitious, idea that has proved vastly harder to implement than its proponents ever imagined.”
  • Finally, nobody knows how people and economies would respond to the implementation of a UBI. Trials offer a worthwhile, but limited way of experimenting. The risks and uncertainties attached to implementing a UBI across a whole economy would be enormous.
  • Contrast this with the existing welfare systems of larger, rich nations. Britain’s welfare state has evolved over more than a century. It is progressive, can respond to social change and is affordable. If voters want less poverty and inequality the existing system can deliver it. The real question is not about systems. It is about the willingness of the public to fund more generous social provision. A UBI would not remove that constraint.
  • This is not, quite, the whole story. It is possible to imagine an emerging nation adopting some variant of a UBI to create basic welfare provision. And in the distant future it is possible to imagine a future in which machines entirely replace humans in the workplace. I don’t, for the moment, think it will happen.  If it did, a basic income might well become essential to share the benefits of growth.

PS: Last week, the media covered two stories on the strength of manufacturing and wider corporate activity in the UK. The EEF, an organisation of manufacturers, upgraded its growth outlook and now expects manufacturing to grow by 2% this year, significantly faster than the overall economy. The CBI’s gauge of growth of business output also hit a two-year high in February. With a significant slowdown in consumer spending, the corporate sector seems set to drive growth in 2018.


US equities fell on the news that Donald Trump’s top economic advisor, Gary Cohn, had resigned over the President’s decision to impose tariffs. The EU provided a list of American products that it could target in retaliation, stoking further fears of a trade war. The City AM’s coverage won our headline of the week with “Hit the Chevy with a levy, tax your whiskey & rye”!

International economic briefing by Ian Stewart

Economics and business

  • Donald Trump’s top trade advisor said there will be no exemptions from US tariffs on steel and aluminium imports
  • ECB President Mario Draghi warned that the US moves towards protectionism were dangerous and posed a risk to growth in the euro area
  • 11 countries excluding the US (accounting for 13% of global GDP), signed the landmark Trans-Pacific Partnership agreement on reducing tariffs
  • Donald Trump demanded that China reduce its trade surplus with the US by $1bn this year, as the US trade deficit hit a nine-year high in January
  • France finalised a law to allow for the privatisation of state assets such as Aéroports de Paris
  • Donald Trump agreed to meet North Korean leader Kim Jong-un
  • UK equities were ranked as the least popular asset class in the world in a BofA survey of fund managers
  • Private equity firms are taking ‘riskier’ bets as a result of the benign economic backdrop, US tax reform and huge cash piles, the FT reports
  • Amazon is in talks with JP Morgan to offer its customers bank accounts
  • Life expectancy in the UK grew between 2011 and 2017 at its slowest pace, compared to any other recent six-year period
  • Average advertised salaries in the UK reached their highest level in nearly two years in February, according to job site CV-library
  • The ECB watered down its ultra-loose monetary policy stance in its latest meeting, dropping an explicit pledge to buy more bonds if necessary
  • New US payrolls grew by the highest amount since July 2016 in February, but wage growth fell to 2.6% from 2.9% last month
  • The UK’s manufacturing sector expanded for a record ninth consecutive month in January, bolstered by the weaker pound and robust global growth
  • The UK’s construction sector output fell in January at its fastest annual pace since 2013
  • Pay-outs for miss-sold PPI have reached nearly £30 billion in the UK since 2011, according to the Financial Conduct Authority
  • House prices in the UK rose at their slowest pace in five years in February, according to Halifax
  • Ahead of the UK Spring statement this week, Phillip Hammond, the UK’s chancellor said debt reduction is still a priority following calls to increase public spending
  • China amended its constitution to abolish the two-term limit for the country’s president, allowing President Xi Jinping to rule the country for life

Brexit and European politics

  • 55% of Italians voted in favour of two Eurosceptic, anti-establishment parties in this month’s elections, which resulted in a hung parliament
  • Germany’s Social Democratic Party voted by a two-to-one majority to forge another coalition with Chancellor Angela Merkel’s conservative CDU Party
  • The EU issued guidelines for a post Brexit EU-UK trade relationship, mirroring the EU-Canada trade deal
  • The guidelines omit any wording on a deal for financial services, Britain’s largest export sector
  • Philip Hammond, the UK’s Chancellor, warned that “significant additional costs” arising from restrictions on the UK’s access to EU financial markets “would be borne by Europe’s businesses and consumers”
  • Northern Ireland’s Democratic Unionist Party said that the EU’s idea of a sea border between NI and the UK is “utterly unacceptable” and would create an “economic catastrophe”
  • The World Bank warned that growing income inequalities within EU countries could stoke political discontent and provide “fertile ground for populism”
  • Euroclear, one of the world’s largest financial clearing houses, announced that it will move its headquarters from Britain to Brussels
  • Jaguar Land Rover said it will not decide whether to build electric cars in the UK until it has more clarity on post-Brexit trading conditions
  • The UK government’s analysis of the economic impact of Brexit found that under a WTO-type arrangement, GDP would be lower by a cumulative 7.7% over 15 years; while under an EEA deal it would be lower by 1.6%
  • The ORB Brexit tracker found that two-thirds of the UK public disapprove of the government’s handling of negotiations but 50% (excluding the undecided) think the UK will benefit economically from it
  • The UK will leave the EU’s Digital Single Market, losing benefits such as zero mobile roaming fees and restrictions on retailer geo-blocking

And finally…

Attendees of the Big Cheese festival in Brighton, UK, are demanding a refund for their £22 tickets as the event ran out of cheese, with organisers blaming the “Beast from the East” for the shortage – cheesed off

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