Australia is not making the economic transition it needs to make but is rather stuck between the mining boom and the goal of domestic based growth, according to Capital Economics chief economist for Australia Paul Dales.
In his preview to tomorrow’s crucial first quarter GDP release, Dales says Capital thought it unlikely that non-mining investment “would seamlessly fill the hole left by the plunge in mining investment”.
“This is especially the case when the economy is saddled with a large amount of spare capacity, which means non-mining businesses don’t need to invest to meet demand,” he said. (His bolding): “With the economy still growing at a rate below its potential, this isn’t going to change soon.”
The “new” problem for the economy, Dales says, is that “dwellings investment won’t be able to offset some of the weakness in total business investment for much longer”.
“Dwellings investment will soon start rising at a slower rate, if not fall outright.”
That leaves the economy stuck in transition.
“We suspect that the release of the GDP figures for the first quarter on Wednesday will show that the Australian economy has continued to grow at a rate just short of its potential of around 2.75%,” Dales said. “This is likely to be a consistent theme of this year, especially when the transition from mining investment to non mining investment is taking much longer than policymakers had hoped.”
That means Capital Economics believes the “growth in Australia for this year as a whole will struggle to match last year’s 2.5%”. That’s largely because “the outlook for investment remains weak”.
A big part of that lack of investment – what RBA governor Glenn Stevens a few years back called “animal spirits” – is because businesses simply don’t need to invest, according to Dales.
“There is still plenty of spare capacity left over from the economy growing at a rate below its potential for six of the last seven years, which means that businesses simply don’t need to invest in order to meet demand,” he said.
That means residential investment and construction is under pressure to continue to carry the can for Australian growth.
But Dales said that’s not about to happen:
Unfortunately, Australia can no longer rely on dwellings investment to come to the rescue. Since 2012, dwellings investment has risen from 4.4% of GDP to 5.8%. That 1.4 percentage point rise (ppt) has offset more than a third of the 3.2 ppt fall in total business investment (mining plus non-mining).
Dales says the Q1 GDP is likely to show dwellings investment rose again “perhaps by 1.5% q/q”. But he added that “it looks as though building activity is on a downward trend”.
That’s important because with new dwellings comes associated consumption to furnish those dwellings. So the slowdown doesn’t just impact construction; it has a multiplier impact across the economy more broadly.
That, Dales says, means “investment remains the weakest part of the economy. And with the economy still saddled with a large amount of spare capacity, the transition from mining to non-mining investment will probably take longer than widely hoped.”