Lacklustre Business Spending is Yet Another Sign of the Coming Recession

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The Australian economy is showing yet more signs of wear and tear. ABS figures show business spending slumped heavily in the first quarter of the year. In total, this resulted in a 4.4% decline in business expenditures between December and March. Worryingly, that figure is double what was originally predicted.

It’s yet another indicator that the economy is starting to tank. And it reinforces the belief that our first recession in 23 years is closer than you may think. I’ll explain why in a moment. But first it’s worth taking a closer look at the miserable business data.

Spending on buildings and structures dropped by 6.5% between December and March. Businesses also purchased less equipment and machinery, falling by 0.5% in the same period.

Mining sector spending dropped by 4.1% up to March, but they weren’t alone. The raft of spending cuts took place across the entire economy. Manufacturing expenditures fell by a substantial 9.4%. The services sector was down 4.2% during this period.

But the bad news doesn’t end there. Companies are forecasting $40 billion in spending cuts for 2015-16. That’s a hefty figure, and it paints a very disturbing picture for the economy. That’s because businesses spend when they see opportunities for growth. Not only are they not spending, but they’re cutting back significantly. Right now, they’re saying they have no confidence for Australia’s economic outlook.

The government has been stressing for months that businesses need to start spending. They’ve wanted non-mining sectors to ‘take up more slack’. But it should be clear by now to the government that’s not happening.

This lack of confidence is partly why the government introduced their small business stimulus. Small businesses can now buy fully deductible equipment worth less than $20,000. These expenditures can be used to offset against their tax bill.

The stimulus will have some effect on smaller businesses. Spending on equipment has dropped by 0.5% since December. That should rebound over the coming months. But it’s difficult to see how it will make up for the $40 billion spending cuts businesses are projecting.

It will also raise questions as to whether the government was right to take on more debt to pay for the stimulus. And it’s yet another sign that we’re hurtling towards our first recession in 23 years.

Why an Australian recession is closer than you think

The Daily Reckoning’s Greg Canavan has been warning for months that prospects for a recession this year are high. You only need to look economic data to see why.

Government debt now stands at an impressive $400 billion. The budget deficit has ballooned out to $35 billion. We’ve come out of the biggest mining boom in our history with nothing to show for it. So why does that suggest a recession is imminent?

Think about it. If an economy is growing, then it doesn’t have to worry about a recession.  But as Greg points out, the economy isn’t growing. Business spending is down and unemployment has crept up to 6.2%. On top of that government debt is rising as tax revenue suffers from falling exports.

Greg questions where growth is going to come from. Sure, the RBA is cutting rates to lift the economy. But instead of businesses using it to invest, it’s just ending up with land hungry investors. All that’s doing is pushing up the property bubble, which shows no signs of slowing down. Greg explains…

“The simple fact is there cannot be a robust recovery when [sic] debt levels are as high as they are. Debt acts as a weight on the economy. A great deal of this debt is ‘bad debt’. That is, it’s supporting assets that in a normal interest rate environment would have to be written down.

These long term problems are already surfacing if you care to look. That is, we now have record low interest rates but we still have sub-par economic growth. Our economic structure is deformed by low interest rates and unproductive debt accumulation. “

That’s the situation we find ourselves in right now. The RBA know that Australia’s economic future will depend on low interest rates and cheap credit. That may make good reading for property investors. But it doesn’t address the underlying concerns over the economy. And it may be enough to push Australia towards our first recession in 23 years.

Mat Spasic,

Contributor, The Daily Reckoning

PS: Greg is one of Australia’s leading investment analysts. He’s written for the The Australian and Sydney Morning Herald. And he’s made regular appearances on CNBC and Sky Business.

He doesn’t believe anything the government, or the RBA, does will be enough to prevent a recession in 2015.

In his free report, ‘Australian Recession 2015: Unavoidable’ Greg reveals why the economic hardship faces all of us. He’ll show you how government debt has ballooned to a crushing AU$400 billion, and why this means a recession is inevitable. Worst of all, he’ll prove to you why the RBA know about this….and why there’s not much they can do about it. Download your copy today and he’ll show you how you can protect your wealth from the imminent fallout. To find out how to download his free report right now, click here.

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.

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1 Comment on "Lacklustre Business Spending is Yet Another Sign of the Coming Recession"

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John Hutchinson
John Hutchinson
1 year 4 months ago

The way I see it is, with the RBA trying to ward off deflation by lowing rates, Business has learned that if they don’t spend, then the RBA will lower rates again.

Why does the RBA want to ward off Deflation? Because consumers will put off spending if they know something is going to be cheaper at a later date. Of course, this is another economic myth, however it may actually be happening within the Business mindset, consumers still don’t seem to be spending either way.

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