Investment tipped to fall over the next year

Private investment is set to decline over the next year, due to ongoing difficulties in obtaining funding from banks as financial uncertainty continues, forecaster Access Economics has warned.

The latest Investment Monitor report also shows that infrastructure programs led by the Government are now responsible for most investment in the country, as private sectors such as mining are still suffering from the downturn.

The latest Investment Monitor report reveals spending on investment declined by 5% to $12.2 billion during the 2008-09 financial year, compared to the previous year.

“While Australia is outperforming other developed nations, investment conditions are weak and investment levels are expected to worsen over the next 12 months,” the report said.

“The falls in corporate profits and capacity utilisation are likely to be large enough to see the pipeline of projects still shrink notably through 2009-10.”

Investment actually grew by $6.9 billion during the June quarter to $230.4 billion, but Access said this is mostly due to infrastructure projects led by the state and federal governments.

“Public sector-driven infrastructure projects are now leading the way in terms of investment growth, with the Federal Government getting more heavily involved in the funding of projects in advance,” the report said.

But Access Economics director David Rumbens says Federal Government spending isn’t going to be enough to offset the downturn in private investment, and that it will continue to decline over the next two years.

“Government spending won’t completely offset the decline, and the Government is aware of that. That having been said, we will experience economic growth over the next two years but because of this decline it’s going to be lower than it would have otherwise been.”

“To a large extent, this downturn was going to happen anyway because we were investing at such a high rate before the downturn, and even in a strong economy there were questions as to whether that was sustainable. The things we can now work on are trying to improve overall demand conditions, access to finance and so on.”

Rumbens says that ultimately, there isn’t much anyone can do to offset the coming downturn in investment spending and that businesses need to hold on to survive.

“Investment will be bad for awhile. From our business outlook forecast we see investment declining 17% and that’s largely just due to the economic conditions we’ve been experiencing. Investment tends to lag other indicators, so while the economy may appear to be improving with consumer sentiment, this is going to drag on for awhile.”

“What businesses need to do is really just pull their heads in and concentrate on their core business. A lot of businesses have let workers go, while some are still trying to hang in there, but the gulf between surviving and making the decision to expand is a big one. In the end, it’s just confidence in the underlying economy and support for the business that will mean the difference.”