Australia: Government spending may help, but investment has been in second gear - AmpGFX

In view of the analysts at Amplifying Global FX Capital, Australian economy is stuck in second gear as it has been transitioning through the downward slide in mining investment on the back-end of a boom since 2013.

Key Quotes

“It has relied much on rapid housing investment, and a large fall in policy interest rates has fueled a dangerous further boom in household debt and house prices in the major cities.  There is little juice left in the household borrowing capacity and now housing activity is peaking, and the economy needs new growth drivers.”

“The lower AUD has helped support non-mining industries, including solid growth in the service sector.  But growth has failed to-date to rise sufficiently to generate a stable well-balanced economy.”

“The infrastructure spending plans by the government should be viewed as a positive for the Australian economy.  The latest measures announced in the budget may take some time to ramp-up to be a significant direct contribution to GDP-growth.  Nevertheless, government spending has already stepped into a higher gear over the last year.  The latest announcement suggests it will continue to be a significant supportive element for the economy now for the medium term.”

“Public investment has already grown strongly over the last year, up 11.9%y/y in Q4-2016, accelerating from negligible levels in 2015, contributing 0.56%pts to annual real GDP growth.”

“The sustained outlook for stronger government spending on infrastructure helps alleviate the downturn in private sector investment in the mining sector.  This is projected to decline for a couple of more years, but at much-diminished pace, with most of the correction from the mining boom that peaked in 2012/13 now complete.”

“Furthermore, as the RBA noted in its May Statement on Monetary Policy (SoMP), much of the remaining decline [in mining investment] is expected to be in LNG investment, which is import intensive and uses relatively little labour. This suggests that the flow-on effects to the domestic economy are likely to be small.”

“In contrast, government spending in airports, rail, and roads, is likely to be relatively labour intensive with a bigger multiplier effect on the rest of the economy.”

“Total capital investment fell 0.1%y/y in Q4-2016, dragged down by private business investment, down 6.0%y/y, but supported by private dwelling investment, up 5.6%y/y, and public investment, as noted already, up sharply by 11.9%y/y.  However, dwelling investment is starting to slow from its peak growth rate in 2015.”

“The slowing in building approvals suggests the contribution to growth from dwelling investment is expected to decline gradually from mid-2017. (according to the RBA SoMP)”

“An area where overall capital investment has disappointed has been in the non-mining private business sector.  The RBA May SoMP said, “Non-mining business investment increased by around 3½ per cent over 2016, although it has been subdued for several years and remains low as a share of GDP.”

“Despite the relatively buoyant surveys of business confidence, the quarterly Capex survey and non-residential building approvals and work-yet-to-be-done suggest non-mining business investment is “unlikely to pick-up significantly over the next year or so” (according to the RBA May SoMP).  However, the Capex survey tends to under-estimate non-mining investment, as it does not capture more some of the more dynamic service sector industries.”