Deloitte Access Economics’ latest quarterly investment monitor has revealed that Australia’s economic slowdown is beginning to impact business revenues.
According to associate director and lead author Sheraan Underwood, this trend has been especially true for businesses reliant on discretionary consumer spending, such as those in the hospitality and retail trade industries.
“At the same time, operating costs continue to increase. Labour costs are above their long-run average and are expected to remain so through 2025, while non-labour costs such as energy and insurance are rising,” Underwood said.
As such, Australia’s challenging operating environment, characterised by decelerating demand and rising costs, is beginning to put increasing pressure on profits.
While many businesses were able to keep profit margins in the vicinity of pre-pandemic levels by passing on higher costs to customers, Underwood explained that total business profits have still fallen over the past year, with the mining industry being notably impacted.
“Businesses are now responding by implementing cost-cutting measures. Against this backdrop, many businesses will find it prudent to shore up their balance sheets and wait for greater certainty around the broader macroeconomic environment before investing,” the associate director said.
“Constrained construction industry capacity is contributing to the muted near-term outlook for business investment.”
However, these pressures are poised to ease at the same time as growth in the Australian economy is forecast to accelerate.
Moreover, the longer-term outlook for business investment across the country is expected to be bolstered by several opportunities, including the significant investment required for Australia’s transition towards net zero emissions.
Technological advancements are also driving investment in areas like generative AI, software and physical infrastructure such as data centres.
“These investments, should they be realised, will drive faster rates of productivity growth over time,” Underwood said.
Project investment climbs over the year, but uncertainties remain
Despite not expanding in recent months, Deloitte revealed that the value of its investment monitor database remains around 15 per cent higher over the year.
According to the company, the database now includes a total of $505 billion worth of definite projects, meaning those that are either committed or under construction. Definite project investment increased by $81 billion last year, almost entirely supported by projects in the transport and renewable energy industries progressing through the planning stages.
However, the value of planned projects in the database decreased by $16.2 billion over the quarter to $601 billion.
“Yet the risks to that outlook have risen,” Deloitte said, noting that high levels of uncertainty have characterised the Australian economy following the pandemic.
Namely, the Economic Policy Uncertainty Index for Australia has rebounded, more than doubling from its recent low in early 2024.
“This has continued a longer-running trend which has seen the average level of uncertainty increase after key economic disruptions such as the global financial crisis and pandemic.
“Uncertainty has a negative effect on economic growth by delaying household spending and business investment. These types of economic decisions are based on expectations about the future. Households typically consider their future income prospects and financial situation before spending, while businesses invest in line with the anticipated demand for the products and services they provide.”
Uncertainty, Deloitte underscored, complicates forming a clear outlook on the future and often dampens economic activity.
Importantly, one standard deviation rise in measures of macroeconomic uncertainty – which the company notes is less than the increase observed in Australia over the past year – reduces annualised real output in the coming quarter by up to 2 percentage points.
“The impact of macroeconomic uncertainty persists for up to seven quarters after the shock,” it said.
Altogether, Deloitte said this suggests that policymakers seeking stronger economic growth should be working towards minimising uncertainty.
“Greater transparency, well-designed institutions and strong communication can help to better guide market expectations.”
“Making policy decisions and their transmission through the economy more predictable will be an important step in driving stronger investment, faster rates of productivity growth and sustainable growth in the economy over the long term.”
