Australia: Modelling the turning point in non-mining investment – Goldman Sachs

Research Team at Goldman Sachs, suggests that the recent rise in non-residential building approvals and slew of NSW public infrastructure announcements are reminders that Australia is now closer to the point where non-mining investment ceases to drag on growth.

Key Quotes

“Even so, our latest analysis suggests that this remains an FY18 story, and is consistent with an ~5% decline in non-mining investment forecast over FY17.

We draw this conclusion with reference to a number of different approaches to modelling non-mining investment. Non-mining investment is not unusually weak given a range of structural factors – rather it is currently estimated to be ~6% higher than long-run equilibrium levels. In turn, the short term component of the model also flags scope for nearer term weakness – as the impact of firm GDP and credit growth is offset by earlier weakness in commodity prices and the diminishing impetus to investment from relatively static real rates.

Encouragingly, these statistical results support the findings of several alternative approaches we continue to lean on to quantify the investment pipeline. Whether via top-down data on surveyed capex intentions and work-yetto- be done, or our favoured bottom-up probability-adjusted project database, non-mining investment looks on track for a further ~5% decline over the coming year.

To be clear, a range of data are consistent with a strong pipeline of road/rail projects in NSW increasingly adding to growth over the coming years. On face value, state budget papers suggest public-related investment in NSW could rise as much as 30% over the coming years, with engineering work-yet-to-be-done lifting no less than 1% of GDP. Encouragingly, NSW realisation rates are also starting to trend higher and revisions across our bottom-up model are increasingly positive.

At the aggregate level, however, while we expect non-mining n investment in NSW will eventually prove an important engine for growth, this good news story needs to be balanced against still subdued (if stabilizing) non-mining capex outlooks across the other key states. Furthermore, extending the analysis to include the mining sector, we stress that further falls in mining capex in WA are likely to more than offset the upside in NSW – seeing business investment strip ~70bpts from GDP growth in CY17 and underpinning our below-consensus GDP forecast (GS: +2.3%; Consensus Economics: +2.7%).

Despite our relatively conservative headline GDP forecast for 2017, we believe now is not the time to be increasingly concerned about declining business investment. We expect investment to contract, but at a slower pace. A reasonable basis now exists, in our view, for non-mining investment to decline a relatively modest 5% before reaching a trough for this cycle. A decline in mining investment still to come looks to be mostly skewed to WA and heavily skewed to the LNG sector - the impact of which will increasingly be mitigated by the ramp up phase of new production. Indeed, the main observation we have been making since the start of 2016 is that a modest upgrade cycle in the nonmining business investment outlook has emerged and recent data has reaffirmed and strengthened that conviction.”