Forex Australia press people noted every detail of RBA Deputy Governor Lowe on a speech on investment outlook. Analysts most specially were concerned by the 3 percentage point drag to GDP from falling mining capex and partly offsetting recovery in non-mining investment to high single digits.
Goldman Sachs see the risks as skewed to the downside with the magnitude of extra capacity in Australia’s non-mining economy, gradual development in end-demand and a modest non-mining investment pipeline.
In simpler terms, forex Australia brokers are keeping an eye on downside risks in Australia’s economy are skewed to the broader recovery falling short of economists’ expectations. Hence, forex Australia brokers believe this will lead to an RBA cut for the last time in 2013.
Analysis of RBA Statements
The following were taken from the key points of the interpretation of Goldman Sachs analysts following RBA Deputy Governor Lowe’s speech in Melbourne about Investment and Australian economy:
(1) Broadly, the speech covered previous ground on the need for a pick-up in non-mining activity to offset an ongoing retrenchment in mining construction. The speech had a particular focus on non-mining investment as part of this broader recovery.
(2) Of note, for the first time, the RBA has put numbers around the expected drag to GDP growth from the mining capex unwind ( approximately -3ppts over the “coming years”) and the Bank’s forecast gradual rise in non-mining investment (“high single digit rates of growth within the next couple of years”).
(3)From Goldman Sachs perspective, firstly – while they sympathise with the magnitude of the mining capex drag – they continue to see the risk skewed towards this occurring earlier than is commonly expected. Secondly – on the outlook for non-mining investment, they see the risks to the RBA’s forecast as skewed to the downside given that i) preconditions for a material pick-up in non-mining investment are closure of the non-mining output gap and a rise in non-mining demand – neither of which appear likely in the near term; and ii) their analysis suggests there are not enough major non-mining (or public) projects in the investment pipeline to drive growth into high single digits.
(4)In his speech Mr. Lowe also identified three key drivers of the forecast non-mining recovery – a falling AUD, rising business confidence, and low interest rates. However, while there have been supportive developments on the first two factors – there was a strong sense in the speech that the AUD and confidence remain hostage to global dynamics and may not remain as supportive for investment moving forward. Clearly, domestic interest will remain sensitive to trends in the AUD and business confidence over the coming months.
(5) In the subsequent Q&A period, Mr. Lowe was asked “what keeps you up at night” and he nominated i) an economic shock out of China and ii) the possibility that an “enduring legacy of the ‘Great Moderation’ is that businesses do not take on risk and invest” – with the implication that the world gets stuck in a “low growth equilibrium”. Mr. Lowe also nominated the high AUD as Australia’s biggest structural headwind and while he doesn’t appear overly perturbed by the recent strength in the Australian dollar, clearly it is unhelpful. The Deputy Governor also indicated comfort with developments in the housing market (given credit growth is sustainable) and the need to retain a focus on productivity (given expectations that the AUD will remain above its long run average for many years).
Forex Australia brokers believe that the speech flags an extremely optimistic outlook for the economic recovery in non mining investment, while the Reserve Bank of Australia has already shifted to a more cautious outlook on the timing/magnitude of the mining capex unwind over the past year.
The forex Australia brokers further added that the amount of extra capacity in the non mining industries and the modest non-mining investment pipeline see the risks skewed towards the recovery of falling short expectations. Over time, they expect weaker than expected activity data to contribute to one final rate cut on the existing cycle which is on March 2014.