One of the big questions in the Australian economy at the moment is why business isn’t investing in the manner that many, including the RBA and Governor Glenn Stevens, believes it should be.
Back in May RBA deputy Phil Lowe told Australian chief financial officers that they had set the investment bar too high for new investments. That followed a theme first strongly articulated by the Governor himself during his July 2014 Anika Foundation speech where he called on business to tap into its “animal spirits”.
ANZ chief economist Warren Hogan has articulated just why Australian business may be so reluctant to invest at the moment, and perhaps into the future.
Hogan told Fairfax that the one thing that really “jumps out” at him is that “basically in a world where there is less return and less growth, there’s also less room for error”.
He said it’s also a world where it’s hard for business to grow.
“Every business is challenged by top line revenue growth. Any macro business, be it a big consumer business, logistics, services or banking, we are in one way shape or form linked to the nominal growth of the economy and that’s our top line revenue growth,” Hogan said.
This feeds back in the business decision making process because it makes the margin of error smaller.
“Where there are six projects out there and you get one of them wrong then it ruins the return on all the others. So that means the level of precision has got to be higher,” he said.
Hogan said the “world is harder” and that means “that we are going to be running much lower growth.”
It sounds like we are also going to have to get used to less investment.
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