Australian policy makers have been scouring economic data every three months for signs of a pick up in investment outside the mining industry. Three years on, and with a 30 percent depreciation in the currency and record-low interest rates, it remains as elusive as ever.
“It has felt a lot like waiting for Godot,” said Gareth Aird, a senior economist at Commonwealth Bank of Australia, the nation’s largest lender by market value. “A lift in non-mining investment remains the missing ingredient in the Australian economic growth transition story.”
Spending among non-mining firms was flat in the 12 months through September and Commonwealth Bank forecasts further weakness in 2016. Without a pick up, the country will struggle to raise living standards or restore growth to its average of 3.2 percent over the past 30 years.
In the Reserve Bank of Australia’s original tidy scenario, as mining investment and commodity prices retreated from record highs, easier policy and a lower currency would encourage firms to open their pocket books. Yet it hasn’t been quite that neat. And Governor Glenn Stevens acknowledged as much when he lamented last week the failure of “animal spirits” to really take hold.
“Capital spending outside of mining is considerably weaker now than I would have expected,” Stevens told a parliamentary panel in Sydney on Friday. “There is very little sign at this point of intentions to invest more and the level of investment remains quite low.”
Part of the reason for the lack of spending is the country’s manufacturing industries shrank as the currency soared to a post-float record of $1.10, fueled by the developed world’s highest interest rates. The car industry is set to shut down by 2017 and aluminum producers have closed. At the same time, Australian consumers are saddled with a massive debt burden that constrains their ability to spend and boost demand.
“Investment remains the Achilles Heel of the economy and the current climate isn’t consistent with a major improvement in non-mining investment,” said Paul Dales, chief economist for Australia and New Zealand at Capital Economics, who predicts the central bank will lower rates another half a percentage point to 1.5 percent this year. Traders see a better than 50 percent chance the RBA will cut its cash rate -- already at a record-low 2 percent -- by 25 basis points by June.
The RBA says that history shows a 10 percent drop in the currency that isn’t associated with a decline in commodity prices, adds 0.5 to 1 percentage point to gross domestic product growth over two years or so. The trouble with that estimate is that it’s based on a time when Australia had a larger manufacturing base and these companies were better positioned to take advantage of a lower local dollar.
Fortunately for Australia, the weaker currency has been a boon for firms that educate foreign students and for tourism operators, which hired labor and helped drive employment growth in the fourth quarter to a record, as they service a wave of Chinese visitors.
Still, capacity utilization -- which measures the proportion of the economy’s productive capacity that is actually in use -- has been below its long-run average for the past few years, providing little incentive to invest, said Commonwealth Bank’s Aird.
On top of that, Australian companies have been more willing to return cash to shareholders rather than borrow and invest, paying the biggest dividends among major equity markets. Australia & New Zealand Banking Group Ltd.’s chief executive, Shayne Elliott, said Wednesday that corporate borrowing demand remains subdued.
RBA Deputy Governor Philip Lowe, the heir-apparent to Stevens when he retires in September, said in May last year that “these firms are effectively saying to their shareholders, ’here, you manage the money, as we do not have investment opportunities that satisfy our internal rate of return’.”
The central bank has regularly noted that it can take a long time for investment to pick up and it often happens quite suddenly. Part of the reason is the duopolistic nature of industries in Australia where two firms simply eye each other off to see who is going to make the first move.
Alan Oster, National Australia Bank Ltd.’s chief economist, noted in a recent business confidence survey that leading indicators were relatively positive as forward orders remained at quite elevated levels, as did expectations for conditions in three- and 12-months time.
“A modest lift in capacity utilization and capex plans for the next 12 months could be hinting at a lift in non-mining business investment,” said Oster, a former senior Treasury official who oversees NAB’s business sentiment survey.
The next quarterly update of the private sector’s investment plans is due Feb. 25.