Aus­tralian econ­omy show­ing signs of tran­si­tion

The Pak Banker - - OPINION - Matt Burgess

AUS­TRALIA'S busi­ness in­vest­ment recorded a sur­prise bounce in the last quar­ter of 2015 as spend­ing picked up out­side the min­ing sec­tor, how­ever the out­look re­mains pes­simistic among sig­nif­i­cant global un­cer­tain­ties de­spite a strong do­mes­tic econ­omy.

The Aus­tralian econ­omy is un­der­go­ing a sig­nif­i­cant and dif­fi­cult tran­si­tion away from min­ing-led growth, tai­lor­ing ser­vices and ex­ports to cap­i­tal­ize on the emer­gent Asian middle class de­spite sig­nif­i­cant global head­winds. Aus­tralia's ac­tual cap­i­tal ex­pen­di­ture rose by 0.8 per­cent in the last quar­ter of 2015 - mar­ket ex­pected three per­cent drop - from a lift in non-min­ing in­vest­ment that par­tially off­set falls in the min­ing sec­tor, ac­cord­ing to Aus­tralian Bureau of Sta­tis­tics (ABS) data re­leased on Thurs­day.

The vex­ing is­sue for pol­icy mak­ers how­ever, early in­vest­ment in­ten­tions for the year to June 2017 showed a sharp drop - 20 per­cent - to 82.6 bil­lion Aus­tralian dol­lars (about 59.3 bil­lion U.S. dolalrs), led by a 35 per­cent drop in min­ing capex as large pro­ject exit con­struc­tion and en­ter the pro­duc­tion phase. Non-min­ing capex rose nine per­cent. A 35 per­cent drop in min­ing CAPEX led the falls, which was to be ex­pected as large projects exit the con­struc­tion and en­ter pro­duc­tion phase. Non-min­ing sec­tor in­creased nine per­cent.

"The capex story is not where you would hope to be at this point," RBC cap­i­tal mar­kets se­nior econ­o­mist Su-Lin Ong said. "It's prob­a­bly still go­ing to drag heav­ily on ac­tivi- ty in the fore­see­able fu­ture and it begs the ques­tion of what gets growth much stronger."

How­ever, the ABS sur­vey ex­cludes a num­ber of im­por­tant sec­tors where driv­ers of in­vest­ment tend to be struc­tural, rather than cycli­cal, such as agri­cul­ture, health and education, the main sec­tors drag­ging Aus­tralia through it's tran­si­tion where in­vest­ment is an­tic­i­pated to be firm, Com­mon­wealth Bank of Aus­tralia se­nior econ­o­mist Gareth Aird said.

"As such, non min­ing in­vest­ment is not ex­pected to be as soft as the sur­vey im­plies," Aird said. It also should be noted the fourth quar­ter capex sur­vey was taken over Jan­uary and early Fe­bru­ary when global growth con­cerns, credit de­faults in the en­ergy sec­tor caused equity mar­kets to fall sharply.

"Th­ese fac­tors would have weighed on 2016/17 capex plans," Aird said. "In con­trast, over the past two weeks mar­ket sen­ti­ment has im­proved and risk as­sets have had a bet­ter time." Fig­ures due next week are ex­pected to show Aus­tralia's econ­omy grew at 0.5 per­cent in the last quar­ter of 2015 for an an­nual growth trend at 2.5 per­cent, a much faster pace than other de­vel­oped mar­kets and away from re­ces­sion fears that sur­faced in 2015.

"An econ­omy run­ning at 2.5 per­cent per an­num, with an un­em­ploy­ment rate around six per­cent per an­num, is a com­fort­able dis­tance from re­ces­sion," Com­mon­wealth Bank of Aus­tralia chief econ­o­mist Michael Blythe said in a note pub­lished Thurs­day. How­ever in­vestors are wa­ger­ing the below-trend growth and global growth head­winds will force the Re­serve Bank of Aus­tralia to cut the al­ready record low two per­cent cash pol­icy to­wards the se­cond half of 2016.

"The rea­son for a lack of in­vest­ment goes be­yond the level of in­ter­est rates and the Aus­tralian dol­lar - th­ese cycli­cal driv­ers of busi­ness in­vest­ment are at lev­els that sup­port, rather than hin­der, in­vest­ment," Aird said. Aird ar­gued there are range of forces hold­ing busi­ness in­vest­ment back in­clud­ing de­mand be­ing weak, the govern­ment's fis­cal pol­icy cre­at­ing im­ped­i­ments to growth, de­mands for share­holder div­i­dends and un­cer­tainty sur­round­ing the type of in­vest­ment needed.

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