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Global uncertainty is rising as political and trade ‘norms’ become ‘less normal’. This rising uncertainty in the global economy is impacting how people are investing and we’ve already seen falls in global trade as a result. But we’re also now seeing a substantial drop in cross-border direct investment with, as Reserve Bank Governor Phillip Lowe has said, many preferring to sit on their hands.
According to data compiled by the OECD, the global volume of foreign direct investment (FDI) fell 20% in the first half of 2019 compared to the previous half-year period. And this decline accelerated in the second quarter when global FDI was down more than 40% from the previous quarter.
The EU has been one of the big losers, with FDI falling more than 60% through the first half of 2019, as investors took stock while Brexit negotiations remained unclear. And unsurprisingly, as the trade and technology war continues, FDI into the US is also down – 27% over the same period (and notably, FDI from China into the US has fallen more than 90% over the last three years).
According to the OECD, Australian FDI volumes have almost halved in the first half of 2019 relative to the same period in 2018, although an unusually strong inflow in the second quarter of 2018 has partly driven this. The good news is inflows are still at reasonable levels (although down from the peaks of recent years), with the largest inflows into mining, as well as strong inflows into financial and insurance services.
So why does this matter? Foreign investment has long supported the expansion of Australia’s productive capacity – not only does it mean more investment to support the economy, but it often brings with it new technologies, management techniques and processes that create broader benefits.
Australia’s recent move to a current account surplus suggests (for the first time in 44 years) Australians are saving more than they are investing. Partially as a result of strong population growth and the need to provide economic and social infrastructure, we more typically borrow from the rest of the world to fund our investment. That is, our savings have generally been insufficient to fund local investment opportunities. As a result, we rely on foreign investment to ensure the economy is not constrained by weaker domestic investment, and when this international investment support wanes, so too does Australia’s all-important investment pipeline.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
William is a macroeconomist who has worked on a range of projects including general macroeconomic modelling and analysis, labour market analysis and time-series and panel data econometric modelling. William has also had experience on a number of CGE modelling projects, conducting economic impact analysis using Deloitte’s regional general equilibrium model as well as experience in business cycle modelling using DSGE models.