For the full picture, download the report – Australian Markets Weekly 13 August 2019

Analysis – Mining investment poised for a modest rebound

• The Reserve Bank thinks the economy may be at a “gentle turning point”, although its forecasts show a somewhat more abrupt improvement in growth, with the slowdown in activity effectively ending in Q1. Indeed, in the August Statement on Monetary Policy, while highlighting a series of near-term downside risks, the risks on the medium-term outlook, which includes 2.8% GDP growth over 2020, were described as more balanced than they had been for some time.
• One factor underpinning the bank’s optimism is a “brighter outlook” for mining investment, which has tumbled from its record high of 9% of GDP in 2012 13 to 2.5%.   We are a little more circumspect on prospects for the overall economy than the Reserve Bank, but share the bank’s view that the the worst is over for mining investment, with spending poised for a modest rebound given: (1) capital expenditure is now failing to keep pace with wear and tear on existing mining assets; (2) miners report a recovery in planned investment; and (3) there has been a rebound in the return on mining capital.
• However, this is not a return to the boom times of 2012 and a modest rebound in investment is unlikely to have much effect on growth given about half the spending is on imports.

The week ahead – RBA speech and labour market data; US-China trade tensions

• In Australia,  RBA Deputy Governor Debelle is speaking on Thursday on “Risks to the outlook”, where he should expand on the downside risk to global growth from the worsening US-China trade conflict. Wednesday should show wages growth remains low, with the wage price index expected to post another 0.5% quarterly increase.  Thursday’s labour force survey should show a modest gain in jobs of 15k with unemployment ticking up to 5.3%.  Weak outcomes would place pressure on the Reserve Bank to cut again given the Board said it was watching labour market developments closely.
• Aside from US/China trade tensions, the focus turns to the state of the US consumer and manufacturing.  Thursday’s retail sales report for June is expected to show continued growth, backed by a still-upbeat level of consumer confidence in the UoM Consumer Sentiment Survey for early August out on Friday. Thursday’s industrial production report for July should show a 0.4% decline in an already-bruised manufacturing sector. The first two regional readings on manufacturing for August from the Empire State and Philly Fed are also out Thursday.  The July CPI on Tuesday should show annual core inflation unchanged at 2.1%.  In China, industrial production, fixed asset investment and retail sales are due Wednesday. Data released so far for July shows ongoing resilience in the Chinese economy with evidence that stimulus measures are gaining traction. German GDP may have shrunk in Wednesday’s read on Q2 GDP.

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