(Bloomberg) -- Australian firms are sitting on their hands when it comes to investing, a key requirement for the economy's successful transition from mining and one reason interest rates are at a record low.
Non-financial companies in the benchmark ASX/200 are holding A$76 billion ($58 billion) of cash, the second highest amount in a decade, data compiled by Bloomberg show. At the same time, expenditure is the lowest in at least 10 years, at just A$33 billion. One theory is that firms are refusing to part with cash because they're more fearful of technological, rather than political, disruption hurting the sustainability of their business models.
“If Amazon turns up and completely revolutionizes the way people buy groceries, you haven't got to worry about Trump if you're running a large distribution network for groceries,” Reserve Bank of Australia board member Ian Harper said in an interview last month. “That degree of existential uncertainty causes people to be extremely leery” about spending.
Harper is one of six independent directors on the nine-member Reserve Bank of Australia's board that economists and money markets predict will keep rates unchanged at 1.5 percent Tuesday, and for the remainder of the year. While a loose labor market, anemic wage growth and weak inflation would normally point to policy easing, Governor Philip Lowe is more concerned about record household debt and soaring east coast property prices.
Data released Monday showed Sydney house prices have surged almost 19 percent in the past year, the fastest annual pace since 2002, while national household debt has climbed to 189 percent of income. Australia's banking regulator further tightened lending curbs on Friday amid concern runaway home-price growth is stoking a housing bubble.
Capital expenditure data in February showed Australian firms plan to invest A$80.6 billion next fiscal year, the weakest result for about a decade, according to Macquarie Bank Ltd. That's despite RBA encouragement under Lowe's predecessor, “glass half full” Glenn Stevens, who said firms' hurdle rates to investment were unreasonably high. The bank has often cited good business conditions, support from low rates and a weaker currency.
The lack of an upswing in investment outside mining prevents a virtuous circle emerging of more hiring and growth, rising wages and increased spending. Firms have blamed political instability for their restraint, an argument met with skepticism by policy makers; however, it's been hard to refute given the country's four changes of prime minister since 2010.
At a global level, the arrival of the Trump administration and its protectionist rhetoric, along with the possibility of a trade war, also raises concerns.
Cyclone Impact
One area that is likely to see increased expenditure this year is northern Queensland after Cyclone Debbie tore through the region last week. Resorts in the Whitsunday region hit by the storm account for about 10 percent of Australia's tourism earnings, according to Commonwealth Bank of Australia.
“Some towns hit hard by the cyclone, like Airlie Beach and nearby Hamilton Island, appear to have had major damage done to private and public infrastructure,” said John Peters, a senior economist at Commonwealth Bank. Governments will rebuild damaged rail, roads, buildings and bridges, while the private sector will rebuild ports, marinas and tourism areas, he said.
The lift in investment could have “substantial positive influences” on the next three quarters' GDP calculations, Peters said. Meanwhile, damage to fruit and vegetable crops could boost headline inflation in the first and second quarters, though the core inflation the RBA focuses on will be unaffected.
“The bottom line of cyclone Debbie for policy settings -- even at this early juncture -- is that it will have next to zero ramifications for the monetary policy outlook -- as the central bank ‘looks through' wild gyrations in the headline CPI when looking at policy rates,” Peters said.
--With assistance from Kimberley Painter
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke
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