Sluggish Australian growth for years ahead as business spending slides

Aerial view of Santos GLNG’s LNG plant under construction at Curtis Island, Gladstone

While Australia is undergoing a residential construction boom a sharp slowdown in business capital expenditure, in particular non-residential construction, will drag on GDP in the years ahead.

That’s the view offered by UBS’ Australian economics team in a report released today in which they warn business investment will likely decline over the next four years.

Here’s what the report said:

Non-residential construction commencements more than halved in the last 2 years – worse than the early 1990’s recession – to the lowest level in almost a decade.

Separately, flat business confidence also suggests soft equipment investment. Finally, another cut to the UBS commodity price outlook sees Australia’s terms of trade collapse a further 11% y/y in 2015, depressing mining capex and dragging nominal GDP growth (that not adjusted for price movements) to just 1.5% in 2015.

Despite the weakness the bank believe residential construction and “solid” household consumption will be able to partially offset the slowdown.

They forecast GDP growth for calendar year 2015 of 2.2%, unchanged from their previous forecast but below consensus of 2.6%. Growth in 2016 is forecast to accelerate to 2.8%, an increase on 2015 but below their previous view of 3.0%.

With the economy tipped to grow below trend this year and next the bank believes the RBA will cut the cash rate by 0.25% to 2.00% in May. They also see the Australian Dollar falling to 70c by the end of 2015. Should that decline not eventuate “it will create a risk the RBA could cut the cash rate below our base-case for a trough of 2.00%”.

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