Australia: Non-mining business investment lifts, but recovery uneven and upside constrained – Westpac

Reserve Bank of Australia Governor Philip Lowe struck a positive tone on business investment in the Statement accompanying the RBA’s policy decision on October 3, notes Andrew Hanlan, Senior Economist at Westpac.

Key Quotes

“He stated that: “Over recent months there have been more consistent signs that non-mining business investment is picking up. A consolidation of this trend would be a welcome development.” Here we consider the case for increased optimism on business investment and assess the outlook.”

“Business investment by the non-mining sectors strengthened over the past year. Annual growth lifted to 4.6% in mid-2017, we estimate, a pace approaching the historic average of 4.9%. That is a marked improvement on a 1.0% outcome in mid-2016 and is the best result since 2011 to 2012, when growth averaged 7.5%. That said, the current pace falls well short of the sustained strength evident during the six years 2002 to 2007, when non-mining investment grew by a brisk 12% a year on average.”

“In summary, business investment by the non-mining sectors has emerged from the softness apparent for much of the post GFC period. There is a need to add to the capital stock to meet the needs of a relatively fast growing population. Moreover, the negative spill-overs from the mining investment downturn have faded and world growth has improved. On balance, we see nonmining business investment growth continuing at around the current 4½% pace, supported near-term by the emerging lift in non-residential building activity.”

“However, we also expect the investment recovery to be uneven, reflective of the uneven nature of the broader economic expansion, with the household sector the key source of weakness. Equipment spending, which represents 40% of total investment by the non-mining sectors, will remain relatively subdued in this environment. If so, it is unlikely that the non-mining business investment cycle surprises materially to the upside, diminishing the prospect of the economy accelerating to a sustained above trend growth path. Our point forecast for December 2018, is total non-mining business investment growth of 5.0%yr, with equipment broadly flat.”