Posted: 04 Aug. 2020 5 min. read

Investment and the long road to recovery

Weekly economic briefing

Investment is expected to be among the hardest hit parts of the economy in 2020 and 2021 – and Deloitte Access Economics’ latest Investment Monitor forecasts that business investment will fall to its lowest point as a share of the economy in almost two decades.

Business investment is money spent today in the hope of earning more money in the future. COVID-19 has led to a collapse in both demand and business confidence, and many businesses are responding by consolidating their operations and making savings where they can. Businesses are expected to remain in cash conservation mode until we’re through this crisis.

Commercial construction may experience a particularly slow recovery due to the increased adoption of work-from-home arrangements and a smaller need for retail space because of the growth of e-commerce. More importantly still, this sector is increasingly working through its existing pipeline of work, without that pipeline being added to at a matching pace.

On the other hand, mining investment is likely to perform relatively well amid strong demand from China. Yet there’s an important caveat – with energy prices (including for gas) having fallen sharply through 2020.

The key to the recovery, when it comes (and when it comes to investment), will be coaxing businesses back into taking a risk. We need them to be spending again. But the Victorian outbreak means the timing of the recovery remains highly uncertain, with business conditions in that state clearly getting worse before they get better.

Victoria’s lockdown (and the flow-on impacts on economic confidence that may deliver in other states and territories) is likely to see an increase in the number of investment projects being cancelled or delayed, while there will also be fewer new projects announced. Fortunately, there is a large pipeline of publicly funded infrastructure projects that will support activity in the meantime – with more than 550 government infrastructure investment projects underway or in planning across the country, worth a combined $314 billion.

Current government infrastructure investment projects by industry

Source: Deloitte Access Economics Investment Monitor June 2020

 

Given the already burgeoning project pipeline, governments are focusing on those that are ‘shovel-ready’, as well as fast-tracking others. Almost $100 billion worth of projects are scheduled to commence construction beyond 2020, or currently have no announced start date. The fast tracking of approvals may mean that more of these progress through to construction – and sooner – than would otherwise be the case.

So, while government spending is expected to increase further in the coming months as new projects are announced, Australia cannot rely on governments alone. Private investment will also need to lift.

Unlocking private business investment will be helped by a stronger economy. Governments can also assist by undertaking reforms that improve productivity – effectively lifting the speed limit of the economy. That would include improvements to infrastructure in our suburbs and regions, key tax reforms, and progress in building skills and encouraging innovation.

More about the authors

David Rumbens

David Rumbens

Partner, Deloitte Access Economics

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.

Sheraan Underwood

Sheraan Underwood

Manager, Deloitte Access Economics

Sheraan is a manager in the Macroeconomic Policy and Forecasting team at Deloitte Access Economics. He works across Deloitte Access Economics key publications including Investment Monitor, which provides detailed data on major business and government investment projects in Australia.