The non-mining recovery: waiting for Godot? | ANZ


ANZ Bank recently released it’s thoughts on the health of Australia’s economy.

While they expect the long-awaited recovery in the non-mining economy to materialise, they point out some of the risks facing our economy including poor consumer confidence.

Here’s what they said:

Last week the ABS released its annual national accounts data. While all economic data are old, these numbers are really old.

But they do give us a more accurate picture of 2013-14, from which we can base our forecasts for the coming year.

  • While there were few changes to the pre-2011 data, disappointingly, growth in the past year was revised down.
    For the 2013-14 year, the ABS now estimates that GDP grew just mining2.5%, rather than the previously estimated 2.9%.
    The primary driver of this markdown was a downward revision to household consumer spending which is now estimated to have risen just 2.2% in the year rather than the previously reported 2.5%. Net exports were also revised lower.
  • The annual national accounts also gave us an update on non-mining investment.
    It was also disappointing, falling 2.6% in 2013-14. Our own analysis, however, suggests that non-mining investment has bottomed in quarterly terms and has turned up in recent quarters.
  • With the building blocks in place for a moderate recovery in consumer spending and a pick-up in non-mining investment, we continue to expect the non-mining recovery to strengthen over the coming year.
    That said, the recent weakness in consumer spending and non-mining investment is a concern and highlights the risks around the timing and strength of the recovery.

Growth in consumer spending remains soft

The downward revision to consumer spending is disconcerting.

Given it accounts for around 55% of GDP, it will be difficult to achieve the desired rebalancing of growth towards non-mining without a recovery in consumer spending.

Moreover, without stronger consumer spending growth, any recovery in non-mining business investment will be short-lived.

Net exports also downgraded

The other key driver of the downgrade to GDP was a smaller contribution from net exports. Net exports are now reported to have contributed 1.6ppt to growth in 2013-14, rather than the previously reported 2.0ppt.

The downgrade came mostly on the export side with export volumes revised down from 6.8% to 6.1%.

While this is disappointing, we continue to expect further strong growth in export volumes over the next few years, driven by the expansion in mining capacity.

Non-mining business investment was also soft

In addition to consumer spending, the second key pillar of the non-mining recovery, non-mining business investment, was weak.

It fell 2.6% in 2013-14, which is the softest result since 2009-10.

The ABS doesn’t publish quarterly measures of non-mining investment, but our own analysis suggests that it probably bottomed out in Q4 2013 and has been trending higher through this calendar year.


What’s ahead

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We continue to expect the long-awaited recovery in the non-mining economy to materialise, but we acknowledge the risks around the timing.

We expect the strong wealth gains households have enjoyed over the past year or so will translate into a slightly lower savings rate and a moderate pick-up in consumer spending.

But six years after the global financial crisis, household caution continues to dominate, and consumer confidence remains particularly fragile.

For Q3, strong growth in retail sales volumes points to a solid rise in consumer spending, although the relationship between the two is not always tight. And any strength in Q3 will need to be sustained.

On non-mining business investment, we remain cautiously optimistic.

In Australia, business balance sheets are in good shape and lending commitments have picked up.

Moreover, business confidence and investment intentions are closely correlated with the US and the strong momentum there should translate into stronger spending here in due course.


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