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Australia’s economy right now is a giant frothy foam party of rising house prices and elevated consumer spending.
It looks amazing in the short term, but beyond that? There’s a warning sign that has just started flashing red.
Right now, people feel flush. Property prices are soaring at record rates, and many Aussies’ bank account balances are also at record levels thanks to a year of huge government payments.
The so-called “wealth effect” is driving consumer spending, and benefiting retail. The question is whether this is sustainable.
Cash in the bank is nice but in the long run jobs come from businesses growing. Businesses need to invest to grow – they need new shops and factories and trucks. But in a very worrying development, lending for business development has turned negative.
As the next chart shows, lending for business investment growth has turned negative only twice before in the history of the statistics. Once was in the 1990s recession. The second time was in the global financial crisis. The third time is now.
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What does investment mean here? It doesn’t mean buying shares. When businesses invest, they invest in themselves.
It means buying things they can use to make their business bigger and better. Aldi might open a new supermarket. Woolworths might buy a better conveyor belt system for its warehouse. Toll might buy more trucks. KFC might open more outlets, etc.
Basically any spending on long-lasting things they expect to help make the business bigger and more successful.
Business investment is really important to the economy, because those bigger businesses hire more people and make more stuff. Businesses investing now make unemployment go down in the future, and economic growth go up. (There’s a delay usually, because they have to get the money, then spend it on, for example, a bigger factory, and it’s only once the factory is up and running that the economy grows.)
Businesses are borrowing to invest less than they were a year ago. That’s new. Throughout the pandemic, credit for business investment was still elevated over a year earlier, until the most recent data. With the end of JobKeeper and the reduction of JobSeeker now behind us, the future is uncertain.
Lower interest rates are designed specifically to lift business investment. The idea is that if they have to pay less interest on their loans, businesses will feel more comfortable borrowing money to make their businesses stronger.
The RBA has cut interest rates dramatically, as the next chart shows. But if lending for business investment is actually falling, it suggests businesses don’t care about a near-zero interest rate – they are not willing to take on debt right now.
Just last month the RBA Governor was lamenting how weak business investment was in Australia compared to consumer spending.
“The rebound in consumption has been strong, with growth of 12 per cent over the second half of last year. Investment is a different story,” he said.
“A durable recovery from the pandemic requires a strong and sustained pick-up in business investment. … Stronger investment would also support a more productive workforce and a lift in both nominal and real wages.”
What he is saying is that the cash the government has been handing out will carry us through for a little while.
But eventually, that cash will be spent, and we will need to go back to the old-fashioned grind of growing an economy by businesses lifting themselves up. He’s worried, because there’s little sign they are actually trying to do that.
If we want ample jobs in a few years time, strong economic growth and decent wage rises, we need businesses to borrow and invest. And that’s the one thing they’re not doing enough.
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