RBA business investment outlook is conservative - AmpGFX

Greg Gibbs, Analyst at Amplifying Global FX Capital points out that the Australia’s business survey data suggest that the RBA’s forecasts for growth presented last week may be conservative. 

Key Quotes

“The RBA said in their 3-August Statement on Monetary Policy that “[business] survey measures are at their highs since early-2008. It further said that, “Many of the conditions that would typically be associated with stronger growth in investment are in place, including low interest rates and high capacity utilisation.”  And that, “Some spillover from the large pipeline of public infrastructure activity to private sector investment could also be envisaged.”

“Sounds pretty positive! However, it forecast “a relatively gradual increase in non-mining business investment growth.”  The RBA noted that, “Investment intentions in the ABS Capex survey suggest that non-mining investment is unlikely to pick up substantially over the next year or so.”

“The RBA admits that this survey only accounts for around half the economy, and omits certain service sectors that have been rising more strongly recently.  The most recent data is from Q1; so it may also not be picking up more recent strength in the economy.”

“In its risk section on business investment, the RBA said, “there is a risk that investment will pick up by much more than is forecast at some point. If a turning point in non-mining business investment becomes apparent, there could be a substantial upward revision to the forecast profile. On the other hand, a recovery in non-mining investment has been forecast for some time and, given the subdued signals from some leading indicators, it remains possible that a substantial pick-up is still some way off.”

“The RBA has forecast that business investment will remain subdued.  Their own analysis highlights the risk that they may be underestimating its strength. The most recent data suggests that the probability has shifted towards stronger private and public sector investment spending that reinforces each other.”