Capex is tanking, and Stephen Koukoulas isn’t sugarcoating it. Business investment has been sliding for three straight quarters, casting a shadow over the economy just as the Reserve Bank of Australia (RBA) looks set for another rate cut on 1 April. The latest data isn’t promising—private capital expenditure shrank by 0.2% in the December quarter, with mining investment down 0.6% and non-mining sectors slipping 0.1%.
Koukoulas, a veteran macro analyst and adviser to the Australian Prime Minister, notes that business expectations for 2025–26 are already falling short of RBA forecasts. “The door has been kicked wide open for another cut,” he says. But with companies hesitant to invest and households pouring back into property, it’s still unclear whether another round of cheaper money will fuel real growth or just stoke speculative bubbles.
Businesses Hesitate, Homebuyers Rush In
The RBA’s 0.25% rate cut in February—its first in over four years—was meant to provide economic relief. Governor Michele Bullock called it “insurance” against stagnation, pointing to weak retail spending and a manufacturing sector shrinking for the third straight quarter.
Yet, businesses remain unconvinced. The capex slump reinforces what analysts have been warning: firms are reluctant to invest. KPMG reports that manufacturing capacity utilisation is stuck at 73.4%, well below the 85% threshold that typically drives new investment. Logistics companies, despite handling 9% more parcels annually, have barely increased spending on automation or new fleets. The reluctance to commit capital suggests uncertainty is overpowering any benefit from lower interest rates.
Homebuyers, on the other hand, aren’t waiting. Mortgage applications spiked 22% in the week after the cut, with investors now making up 38% of new loans—up from 29% a year ago. Sydney’s housing market reacted immediately, with auction clearance rates jumping to 73% and home prices climbing 1.1% in February—the fastest monthly increase since 2021.
UBS analysts caution that Sydney’s price-to-income ratio has now hit 9.3x, surpassing the 2017 peak. First-home buyers, already struggling with affordability, now face even fiercer competition from investors taking advantage of lower borrowing costs.
Mining’s Slowdown and Growing Concerns
Mining, long a cornerstone of Australia’s economy, is showing signs of caution. Investment dropped 0.6% in the last quarter of 2024, and new project approvals are down 38% year-on-year. BHP recently shelved a $4.9 billion expansion at Olympic Dam, citing escalating costs and regulatory uncertainty.
Rio Tinto’s CEO Jakob Stausholm is blunt about the risks. “Australia risks pricing itself out of critical minerals markets just as global demand surges,” he warns. Mining operations here already cost 12% more than their Chilean counterparts, and tightening environmental laws now add months—sometimes years—to approval processes. The combination of rising costs and policy hurdles is making Australian projects less attractive in an increasingly competitive global market.
Dollar Drops, Winners and Losers Emerge
The rate cut sent the Australian dollar tumbling 4.2% against the US dollar. That’s a mixed blessing—exporters in mining and education are benefiting (resource exports rose 2.3% monthly, and international student applications are up 17%), but importers are feeling the squeeze.
Toyota Australia has already warned that if the dollar stays weak, vehicle prices could rise by 7% by mid-year. Travel operators see a split impact—cheaper currency is pulling in more inbound tourists (bookings up 12%), but Australians are reconsidering overseas trips, which could dent outbound travel revenue.
Where’s the Money Going?
With businesses keeping their wallets closed, money is flooding into alternative investments.
- Farmland: Institutional buyers are betting on food security, pushing NSW agricultural land values up 14% last year.
- Art Market: Sotheby’s Australia reports a 23% spike in sales, led by mid-career artists.
Cryptocurrency: BTC Markets saw a 41% trading volume jump post-cut, despite continued ASIC warnings.
A Tug-of-War Between RBA and Canberra
The latest rate cut has exposed a growing divide between monetary and fiscal policy. While the RBA is easing, the federal government is tightening the purse strings. The May budget is expected to prioritise surplus targets over economic stimulus.
State governments aren’t helping either. Victoria has already announced a 12% cut to infrastructure spending, pulling $2.1 billion from the 2025 pipeline. Economists estimate that this “austerity drag” could offset nearly half of the stimulus expected from lower interest rates.
And then there’s China. With 63% of Australia’s exports linked to resources and education, slower-than-expected Chinese GDP growth (3.8% in Q4 versus a 5.2% target) raises concerns about future demand. If China’s economy weakens further, it could trigger fresh turbulence in Australian trade and currency markets.
What’s Next?
For mortgage holders, the February rate cut has already delivered immediate savings—a family with a $750,000 home loan is now paying about $120–$150 per month. But the wider economy is in murkier territory. If capex continues its downward slide, cheaper borrowing alone won’t be enough to get businesses to spend.
Koukoulas believes another rate cut in April is now a near-certainty. But if business confidence remains low, the RBA’s strategy could end up propping up housing and financial speculation rather than fostering real economic growth.
The coming months will reveal whether these cuts spark genuine recovery or just set up the next big problem. Either way, the cash tap is about to turn again.
Capex (short for capital expenditure) is the money businesses spend on things that help them grow or operate long-term. This includes buying equipment, upgrading technology, building factories, or expanding offices.
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