Weak investment data to spur RBA measures

Weak third-quarter business investment data has raised fears that Australia is experiencing fallout from the US-China trade war.

Reserve Bank governor Philip Lowe Picture Stephen Cooper

Weak third-quarter Australian business investment data has raised concerns that the big commodity exporter is now experiencing direct fallout from the US-China trade war.

Business investment fell a seasonally adjusted 0.2 per cent in the quarter, and 1.3 per cent from a year earlier, the Australian Bureau of Statistics said on Thursday. That followed a 0.6 per cent quarter-on-quarter drop in investment in the second quarter.

Firms shunned investment in equipment, which fell 3.5 per cent in the quarter, its biggest drop since 2015. The data prompted economists to downgrade GDP growth forecasts for the period.

The data has cast further doubt on the Reserve Bank’s upbeat expectations for the economy next year, with a national accounts report card due out on Wednesday.

“This is a disappointing result but not unexpected,” said Kristina Clifton, economist at the Commonwealth Bank.

“The ongoing trade issues between China and the US have ­created a lot of uncertainty.”

This was not the sort of environment where businesses felt comfortable investing, she said. There had been a sharp pullback in business investment and investment intentions globally.

“It seems the uncertain environment is also impacting on Australian businesses … that is consistent with the sharp fall in business conditions and confidence this year,” she said.

The escalation in global trade tension spurred the RBA’s decision to cut interest rates three times this year. On Tuesday, RBA governor Philip Lowe explained to market economists how the central bank would approach alternative policy measures, if needed.

Australia posted its first current account surplus in 44 years in the second quarter on the back of surging iron ore prices, prompting speculation that the country would enjoy some immunity from rising geopolitical risks around the world.

But economists are now warning that local firms are directly in the firing line of the trade war, given their deeply rooted global supply chains.

ANZ Bank senior economist Felicity Emmett said Australian firms were scaling back their investments, adding to the weak tone of the data. While mining firms remained fairly positive, non-mining firms had lowered their expectations and planned to reduce investment by 3 per cent this financial year, compared with expectations of a 6 per cent rise last quarter.

“This is a disappointing outcome and likely reflects weak business confidence amid global uncertainty,” Ms Emmett said.

The weak investment report will help frame the RBA’s final policy meeting for 2019 on Tuesday, with most economists expecting it will hold its official cash rate at a record low 0.75 per cent, but tell financial markets that the case to cut interest rates further was discussed.

Most economists expect the RBA will cut interest rates again in February, with many forecasting an unprecedented move by the central bank to adopt quantitative easing later in the year.

A moribund GDP growth report next week will also increase pressure on Josh Frydenberg to consider doing more to help lift the economy.

The Treasurer is expected to announce a mid-year review of the government’s 2019-20 budget next month, which is set to forecast a budget surplus in 2020-21, the first in more than a decade for the government.

It raises the prospect that 2020 will see the RBA adopt extreme policy measures to keep Australia’s record economic expansion going, just as Canberra moves to keep a tight rein on the budget, potentially creating a headwind for the economy.

The Wall Street Journal