Last week, in responding to widespread business anxiety over the economic outlook, the Queensland Treasurer tried to talk up the economy by noting the June quarter National Accounts revealed a 5.7% increase in private investment in Queensland. Such strong growth is probably not sustainable, however, as discussed below.
We need to break the private investment growth down to understand just how excited we should be about it. On its face, 5.7% quarterly growth sounds like a great number, but let’s have a closer look. The state Treasurer referred to what the ABS labels Private Gross Fixed Capital Formation (GFCF) – i.e. fixed capital investment, rather than investments in shares, bonds, or even land (see the GFCF definition from the ABS). It includes capital investments in new houses and apartments, as well as business capital investments. If we exclude dwelling investments, we find the business Investment sub-component of private GFCF grew at 7.2% in Queensland in June quarter (compared with 0.8% nationwide).
So what drove such impressive growth in business investment in Queensland (see my previous post for a time series chart) and how much momentum is behind the upswing? In Queensland and nationwide, investment in machinery and equipment grew strongly at 7.4% and 3.4% respectively in June quarter. In Queensland, we also saw strong growth in non-dwelling construction (i.e. offices, shopping centres, infrastructure, etc.) in the June quarter of 8.7% compared with a fall of 1.9% nationally. Hence, Queensland massively out-performed national average business investment growth in the June quarter (Table 1).
Table 1. Growth rates and percentage point contributions to total growth of business investment categories, June quarter, ABS National Accounts estimates
|Business investment type||Percentage change – Qld||Percentage change – Australia||Percentage point contribution – Qld||Percentage point contribution – Australia|
|Machinery and equipment||7.4%||3.4%||2.9||1.2|
|Cultivated bio. resources||-1.0%||-0.4%||0.0||0.0|
I don’t expect business investment in Queensland to continue to grow at such a strong rate.
First, consider that the strong growth in machinery and equipment investment in June quarter is probably related to generous accelerated depreciation or instant asset write off/temporary full expensing incentives. So some of it will be brought forward expenditure that would have been made in a future quarter. Also, some of the spending counted as business investment may reflect tax minimisation rather than genuinely expanding businesses.* Indeed, we’ve seen strong growth in the number of new businesses registered in the first half of 2021, which could be related to tax minimisation (e.g. by claiming home or lifestyle expenses as business expenses). Grady Wulff has a good story on this possibility at Grafa:
Second, in Queensland, we haven’t seen any significant expansion of the pipeline of private sector infrastructure investment (see Qld’s heavy CAPEX pipeline dominated by public sector projects) or non-residential construction (see the chart below) over the last few quarters, so we probably shouldn’t expect such strong growth to continue for long. Luckily for the heavy construction sector, there is a reasonable public sector infrastructure pipeline, including the ongoing Cross River Rail project (see the chart in the last QEW post linked to above).
The June quarter National Accounts data were good news for Queensland, but the good news won’t last obviously, given the lockdowns in southern states, a likely lockdown in SEQ any day now, and ongoing border closures. It’s a shame that the strong growth in business capital investment we saw in June quarter probably won’t be sustained, because the Queensland economy will need all the help it can get over the rest of 2021.
*Hat tip to Dr Marcus Smith from Brisbane West Chamber of Commerce for him pointing this out to me.
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