The RBA just explained why stronger business investment is making it more confident about the future

Matt Roberts/Getty Images

Of all the parts of the Australian economy right now, few fill the Reserve Bank of Australia (RBA) with confidence more than the outlook for non-mining business investment.

Only last week in its quarterly statement on monetary policy, it noted that recent data revisions suggest “non-mining investment growth has been stronger than previously thought”, adding it had “removed some of the downside risks to non-mining investment” flagged in previous statements.

At a time of weaker-than-usual household consumption growth, this rebound in activity, fitting with a noticeable rebound in Australian business confidence and conditions as seen in the monthly National Australia Bank survey, has been a welcome development.

That optimism was yet again on display in a speech delivered by Guy Debelle in Sydney today with the RBA deputy governor suggesting there are now “signs of life” emerging in non-mining business investment, particularly in the services sector.

“The annual national accounts data indicate that much of the growth in business investment in recent years has been in the services sector, including industries such as health, information, media and telecommunications,” he said, pointing to the chart below showing the noticeable lift in services investment seen in recent years.

Source: RBA

“It now appears that there has been a solid upward trajectory in non-mining business investment over the past couple of years,” he says.

He also cautioned about reading too much into quarterly private business capital expenditure data released by the ABS, noting it did not provide the best guide on broader investment levels given it fails to capture spending in large sectors such as health and education.

“The capital expenditure survey covers only around half of investment spending in the non-mining sectors. So it is not a particularly comprehensive guide to either the current level or outlook for aggregate non-mining investment,” he says.

Adding to the RBA’s optimism on the outlook for business investment, Debelle also pointed to positive economic spillovers from a recent pick-up in public infrastructure investment.

“A share of these projects have been completed by the private sector on behalf of the public sector, some of which have been recorded as private investment in the national accounts as the work occurs,” he said.

“This has boosted investment growth, both as a direct consequence of the infrastructure spending and, increasingly, in spillovers to other parts of the economy.”

Think employment growth, for one, as an example as to how this lift in spending has helped boost the economy, providing a cushion to the moderation in residential construction from the elevated levels seen in prior years.

Although the RBA’s optimistic views on non-mining business investment have been known for some time now, featuring regularly in the bank’s commentary in policy statements, it clearly sees this as a lead economic indicator on what lies ahead for the broader Australian economy.

Debelle provided a basis example to reinforce this point, noting that like the mining infrastructure boom before it, non-mining firms wouldn’t be lifting investment if they thought demand conditions will remain subdued.

“Mining investment was strong because expectations for future demand were high and there wasn’t that much uncertainty around that expectation. Expectations of demand elsewhere have not been strong,” he said in concluding his speech.

“We are now seeing signs of that dynamic changing around the world and in Australia.

“With any luck, it will be sustained. This will be timely for the Australian economy as the mining investment story draws to its close.”

Given that cautious optimism, it also points to the need for household demand — the most important part of the Australian economy — to recover in the period ahead to ensure the “signs of life” in non-mining investment can continue in the years ahead.

That all but ensures that upcoming labour market and wage data will be crucial in determining not only the outlook for business investment, but also the strength of economic growth and future movements in interest rates.

We’ll find out more on those fronts later this week with the ABS set to release new data on Australian employment growth and wage pressures.

Of all the events this week, these will undoubtedly take centre stage given their importance to what lies ahead for the broader economy.

You can read Debelle’s full speech here.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.