For the full picture, download the report: Australian Markets Weekly 4 November 2019

Analysis – Business investment held back by unprecedented weakness in machinery and equipment

• Business investment is exceptionally weak at present, only slightly above the multi-decade low reached as a share of GDP in the early 1990s recession.  Some of this weakness reflects the end of the construction phase of the mining boom, as well as the structural decline in farm investment, where there has been an added drag from a devastating drought.
• However, non-mining/farm investment is also very weak, held back by machinery and equipment, which has languished at a multi-decade low after a deep slump during the global financial crisis.  Our analysis show that this weakness is broadly based across the main types of capital goods and by industry.
• The depth, breadth and persistence of the weakness in machinery and equipment is unprecedented in the post-WW2 period.  We think a turnaround in investment requires a sustained recovery in consumer-led demand, although the government could assist via tax incentives.  That looks on the table for next year’s budget, albeit constrained by the government’s objective of reaching a budget surplus.

The week ahead – RBA on hold, RBA agreement and forecasts; NZ labour market

• In Australia, the Reserve Bank is expected to keep the cash rate unchanged at 0.75% and retain an easing bias on Tuesday (consensus: 0.75%; market pricing: 0.74%).  The bank is also expected to release an updated Statement on the Conduct of Monetary Policy, which is the agreement with the government on policy.  We expect the statement will retain the 2-3% inflation target and likely introduce a BoE-style requirement of a public explanation when inflation has missed the target.  Less clear is whether it will emphasise the midpoint of the target or extend to unconventional monetary policy.  Friday’s Statement on Monetary Policy should downgrade the bank’s near-term growth forecasts.  The outlook for inflation and unemployment should be unchanged, although the bank might trim its unemployment profile.   In NZ, we expect the unemployment rate to edge up to 4.1% from 3.9% and annual growth in the private ordinary-time LCI to pick up to 2.4% from 2.2%.
• Internationally, the BoE is expected to remain on hold, with the market focused on political opinion polls that currently point to either a Tory win or a hung Parliament.  Globally, the focus remains on the US-China trade war.

Please see the pdf for detailed analysis: Australian Markets Weekly 4 November 2019