Non-mining investment is at levels not seen since the 1990s recession but a falling Australian dollar, low interest rates and improving business confidence should turn things around.
Reserve Bank deputy governor Philip Lowe says growth in Asia had helped Australia experience an investment boom during the global financial crisis when other developed economies were experiencing an investment drought.
But although mining investment thrived, investment in Australia’s non-mining sectors was depressed, so the economy will need to be rebalanced as the mining investment boom winds down, he said.
“As a share of nominal GDP (gross domestic product), non-mining private business investment is currently around three percentage points lower than its average over the period from 2005 to 2008 and it is not much above levels seen in the early 1990s recession,” Dr Lowe said in a speech to the Australian Investment Conference in Melbourne on Thursday.
“The low level of overall non-mining investment has occurred despite corporate balance sheets being in generally sound shape and firms having significant holdings of liquid assets.
“It has occurred despite financial institutions reporting that they are willing and able to lend, and it has occurred despite lending rates being at record lows for both large and small businesses.”
Dr Lowe said the factors behind the low levels of investment were the high Australian dollar, post-financial crisis fears, changing household spending behaviour and a lack of business confidence as a result of the high exchange rate and policy uncertainty due to the previous hung parliament.
But, he said, the RBA expected non-mining investment to pick up to at least high single-digit rates within the next couple of years, thanks to the depreciating exchange rate, improving business confidence following the federal election and low interest rates.
Whether business confidence could be sustained would depend on international events as well as domestic policy choices, he said.
“Business confidence – and thus the preparedness to take risk – is likely to be higher if the policy environment is predictable and there is strong commitment to ongoing reform to make markets work well and to boost productivity,” he said.
“Ensuring that regulation is fit for purpose is also important. So too is ensuring that the general business environment promotes innovation.”