Australia's business investment outlook might finally be ready for liftoff

Photo: Getty/Paul Gilham

Today’s NAB business survey showed business confidence soaring in June, which is good economic news because not only were confidence and conditions up, trading was a super strong +20.

But even with this strength there remains a big unanswered question in Australia, and indeed the globe, about why businesses are so reluctant to invest.

It’s something the RBA has been wondering out loud for some time now with RBA Governor Glenn Stevens and deputy Phil Lowe asking what’s going on with the stickiness of Australian business hurdle rates and lack of “animal spirits”.

It’s a good question and one the NAB asked respondents to this month’s business survey.

What the NAB found was that even though the required rate of return – the hurdle rate – differed across industries, the “average response was around 13.5%, which is significantly above the current cost of capital.” That, the NAB said, was “consistent with RBA and other survey findings reported in the RBA’s Q1 Bulletin.”

On the face of it that’s bad news. But the business survey has some indicators which suggest business just might be a little closer to starting to invest again.

“A lift in forward orders and stronger trading conditions coincides with a notable pick-up in capacity utilisation, to 81.3% (up from 80.9%). Following last month’s gains, the trend appears to have resumed its previous upward trajectory – a welcome sign given the growing reliance on non-mining investment to drive economic growth,” the NAB said.

The survey also found that “capacity utilisation remains well down on previous peaks and is only slightly above the long-term average” which might temper investment.

So, we asked NAB chief economist Alan Oster what he thought.

Oster told Business Insider their internal surveys “point to a kick in confidence at the SME level” adding that this was translating to “improved SME credit demand.”

Demand for credit is the fuel that fires the investment rocket and even though Oster wasn’t sure if it was just NAB’s specific demand or representative of broader system demand he said it was a positive lead. NAB’s bankers are also reporting a lift in activity and demand for credit.

Certainly mining has left a big hole, but when you add it all up the signs are there that non-mining investment might finally be about to lift off in coming quarters.

While the NAB forecasts for growth over the next year or two recognise business is still somewhat reluctant to invest, it also believes the next move from the RBA will be an increase in rates in 2016.

Oster said “it is worth noting that while the international volatility create risks to the downside on the forecasts, local data is pointing to upside risks.”

Upside risks, like stronger business investment, perhaps?

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