SYDNEY (Nov 27): The Australian economy’s rebalancing away from mining to other industries looks to be finally under way, validating the central bank’s strategy of keeping record-low interest rates and calling for a weaker currency.
Investment by firms outside of mining and manufacturing grew 5.5 percent in the third quarter, the biggest gain in almost four years and offsetting a 3.5 drop by resources companies, government data showed today.
Based on estimates included in the numbers, investment by these other industries should rise nine percent in the current financial year that ends June 2015, said Shane Oliver of AMP Capital Investors.
“This is a sign of rebalancing in the economy as we see the mining boom unwind while other industries kick in as a source of investment,” said Oliver, Sydney-based head of investment strategy at AMP, which manages about US$125 billion.
“This will give policy makers comfort that the rate cuts and falling Aussie dollar we’ve seen to date are flowing through to strengthening investment in other parts of the economy.”
The data will encourage the Reserve Bank of Australia in its policy of patience, having kept borrowing costs at 2.5 percent for 15 months and flagged they will remain unchanged to stimulate domestic growth drivers.
In response, housing has boomed, while companies have proved more reticent to open their pocket books without greater signs of consumer demand.
Today’s report showed total new capital expenditure unexpectedly rose 0.2 percent, compared with a forecast 1.9 percent drop in the third quarter.
Buildings and structures fell 1.9 percent in the three months through September, while equipment, plant and machinery, which feed into gross domestic product data to be reported next week, advanced 4.4 percent.
Forecast spending
It showed Australian companies forecast investment of A$153.2 billion (US$131 billion) in the year ending June 30, 2.2 percent higher than their estimate three months earlier.
Mining investment is estimated at A$86.3 billion in the period, a drop of 17 percent from the same estimate a year earlier, while manufacturing investment is seen 11 percent lower.
The other industries, which are forecasting growth in investment and accounted for about 40 percent of total capital spending in the quarter, include retailing, financial services, transport, telecommunications and utilities.
A separate private report earlier today showed that sales of new homes in Australia advanced three percent in October.
Aussie weakness
The Australian dollar fell 7.3 percent in the third quarter and in the past month has dropped a further 2.8 percent, as the nation’s terms of trade have weakened, led by a fall in iron-ore prices.
The Aussie is likely to continue to slide with commodity export prices, RBA Deputy Governor Philip Lowe said this week.
“If the exchange rate is to play its important stabilizing role, it needs to go down when the terms of trade and investment are declining,” Lowe said Nov 25 in Sydney.
“We have seen some adjustment, but if our assessment of the fundamentals is correct we would expect to see more in time.”
The central bank said in its quarterly forecasts released earlier this month that the economy is likely to remain subdued until the middle of next year.
It predicted that unemployment, currently at an 11-year high of 6.2 percent, is unlikely to fall sustainably in the near term.
“The RBA would be happy seeing the investment numbers,” Oliver said.
“Is it going to cause them to revise up their growth forecasts or start to think their bias on interest rates should be to tightening? I don’t think so. They’d probably wait for more confirmation in the months ahead.”