For the full picture, download the report – Australian Markets Weekly 7th October 2019

• Across advanced economies, business investment has underwhelmed since the global financial crisis, contributing to weak productivity and lower potential growth.  Disappointing investment has reflected relatively weak demand and increased uncertainty about the outlook, which has increased the desire to save rather than invest. The Reserve Bank views that excess of global saving over weak investment as a key driver of lower global interest rates.
• Australia has mirrored these trends. In Q2 2019, Australia ran a current account surplus for the first time since the 1970s as higher national saving exceeded weak national investment. That means Australia is now a net exporter of capital.
• Lower national investment has been driven by a large drop in non-financial corporate investment and the downturn in housing construction. In contrast, higher national saving reflects the Commonwealth and non-financial corporations both benefitting from strong mining profits.
• Although much of the decline in corporate investment reflects the end of the construction phase of the mining boom, non-mining business investment has languished since the global financial crisis, not far from past recession lows.  This suggest to us that Australia’s productivity, potential growth and interest rates are likely to remain low until the Reserve Bank and the government engineer a meaningful turnaround in private demand that encourages companies to lift investment.

The week ahead – NAB business survey; US-China trade talks

• In Australia, the September NAB Business Survey on Tuesday will provide a timely update on the health of the business sector. Recent prints have shown business conditions holding steady at positive, but below-average levels. Home loan approvals should show a further gain in August.  In New Zealand, partial data should confirm that growth is slowing, although near-term inflation is set to surprise the RBNZ to the upside.
• US-China trade talks restart on 10-11 October. Our base case is for little meaningful resolution from these talks as reports suggest the US administration is divided over the potential for a partial deal. The Fed minutes due Wednesday will be important, but pre-date recent weak US data. The US CPI should show if tariff increases are lifting consumer prices. UK PM Johnson’s Brexit proposals continue to be vetted by Brussels in the lead-up to the 17-18 October EU Summit. Our base case remains an extension of Article 50 on 31 October is more likely than a deal.

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