Post-pandemic bounce temporary as rate rises threaten

Marion Rae and Paul Osborne | February 3, 2023

The investment outlook has darkened as further rate rises threaten to tip Australia into an unnecessary recession, according to a leading forecaster.

A weaker outlook for Australia and the global economy has prompted Deloitte Access Economics to revise its forecast down for business investment in 2023.

Generous government incentives have supported investment during the COVID-19 years but business confidence has fallen amid rising costs and falling demand.

The Reserve Bank is expected to increase the cash rate on Tuesday, but the forecaster said the central bank should leave it at 3.1 per cent for the time being to wait for past rate rises to take effect. 

“Any further increases in the cash rate may unnecessarily tip Australia into recession in 2023,” the latest Investment Monitor report said.

The quarterly report on major business and government investment projects tips business investment to rise by 1.6 per cent in 2023 and 0.4 per cent in 2024.

“Against an uncertain economic backdrop, decision-makers are expected to delay some planned spending,” forecaster Stephen Smith said.

Australian Petroleum Production and Exploration Association chief Samantha McCulloch told a parliamentary hearing on Friday a broad range of economic investment, beyond the resources sector, was at risk due to the government’s intervention in the gas market.

“Investors across the economy, including overseas investors who have contributed so much to the resilience of the Australian economy over the last two decades, are watching what is happening with great concern,” she told the Senate’s cost of living inquiry.

“Our capital is mobile and if Australia loses its reputation as a safe, dependable investment destination it will have significant repercussions across the economy and on the cost of living for all Australians.

“This is especially the case given the investment we need to grow the economy and maintain secure affordable energy supply while we transition to net zero (emissions).”

She said in the east coast gas industry alone there was $20 billion of investment planned.

Public investment is expected to shrink this year and detract from overall economic growth, according to the Deloitte report.

Add in the gloomy outlook for household consumption and dwelling investment, and the numbers suggest economic growth of 1.7 per cent in the 2023 calendar year – down from 3.6 per cent in 2022.

The risk of a sharper-than-expected slowdown in the global economy presents a key risk to the outlook for Australian engineering and non-residential construction, Mr Smith said.

That’s because businesses are unlikely to expand their operations if they think the demand for the goods and services they offer will be lower in the future.

But investment in the mining and processing of metals such as iron ore, copper, zinc, lithium and nickel is viewed as a key growth opportunity.

Exploration for iron ore is being outstripped by exploration for base metals, as miners race to secure the minerals underpinning the global clean energy transition, the report said.

Commodity prices are forecast to moderate in 2023 as global economic growth slows but the war in Ukraine and China’s reopening could cause price spikes in the short term.

The Tax Institute said a time of rising interest rates and a cost of living crunch, which threw a spotlight on economic stability, presented an opportunity for the government to consider comprehensive tax reform.

The institute’s Scott Treatt said the International Monetary Fund had correctly suggested rebalancing the system, from high direct to indirect taxes.