Utes, harvesters, production lines: How Australian businesses have gone machinery mad

The baton has been passed. Consumers led the COVID recovery for a time. Now it’s the turn of business. The latest economic growth figures show that business is stepping up in a major way, not only by spending more now, but doing the kind of spending that permits even more economic growth in future.

The GDP data for the March quarter was enough to make even a bearish forecaster quietly optimistic. Business investment in equipment and machinery grew at its fastest rate since 2009, as the next graph shows. 

This tremendous growth in business equipment is a response to the gleeful way Aussie consumers have been spending, argues Westpac economist Bill Evans. Here’s how he put it in a note to the bank’s clients:  

“Businesses will only add capacity if they expect sustained strong sales growth and the outlook for the consumer remains a paramount. With confidence levels remaining high; spare capacity coming down; and generous tax incentives there is good reason to be optimistic about business investment — so long as the economy deals successfully with the virus and prospects for the opening of the national border improve.”

Spending $2 billion more than last quarter on equipment (seasonally adjusted) is a near-record lift. Of course, this surge follows a lull in 2020, represented by the red bars on the above graph. Business is to some extent playing catch-up, as you can see on the next graph. The level of business investment in equipment and machinery is high and rising, but not quite at the enjoyably elevated levels of the mining boom, just over a decade hence.

You may indeed notice in this graph that business investment in equipment and machinery has flatlined for much of the past decade, a datapoint that has generated much theorising. Some experts believe the increased role of services in the economy — Netflix, Google, Facebook, etc — means less business investment is need for each dollar of output. (Business investment in software is just a quarter of its investment in hard capital items like utes and jackhammers).

Is this explanation true? Is the most recent quarter of data the beginning of the end of this strange period of stasis in business investment? Time will tell. One thing we do know about the surge in spending is that it is very welcome in Canberra.

In the May budget, Treasurer Josh Frydenberg acknowledged his role in getting businesses spending on shiny new tools and trucks. 

“Our record investment incentives are filling the order books of the nation,” Treasurer Frdenberg boasted on budget night. 

“Over 99 per cent of businesses, employing over 11 million workers, can write off the full value of any eligible asset they purchase.”

The instant asset write-offs mean lower tax bills for businesses in the year they invest, and those investments also raise the productive capacity of the nation

The lift in investment is welcome in the corridors of Treasury. More business activity leads to smaller deficits after all. So very welcome, in fact, that Frydenberg extended the temporary full-expensing measure “…for a further year until 30 June 2023, so a tradie can buy a new ute, a farmer a new harvester and a manufacturer expand their production line”.

To see how investment in machinery and equipment can be a virtuous cycle, look no further than Bunnings.

The hardware company, which services a mostly weekend DIY crowd, has recently branched out. It spent a large sum acquiring tool retailer Adelaide Tools, which sells tools to tradies who consider themselves above buying their hammers at Bunnings. 

Bunnings plans to expand Adelaide Tools all over the country, opening a rumoured 75 stores. That is in response to small business buying equipment they need, and will add further to the flow of investment in machinery and equipment. All the forklifts, cash registers, shelving and odds and ends required to put together a retail outlet is measured under business investment in machinery and investment. 

Thus does the economy grow, business to consumer, business to business, and so on and so on.