RBA says Australia business investment picking up

by BLOOMBERG

SYDNEYAustralia’s central bank said improved expectations for demand are driving a pickup in non-mining business investment, helping to buoy the post mining-boom economy.

“It now appears that there has been a solid upward trajectory in non-mining business investment over the past couple of years,” Reserve Bank of Australia (RBA) deputy governor Guy Debelle said in a speech delivered in Sydney yesterday.

Non-mining investment had been hampered by sluggish global economic growth, pessimism among businesses about future prospects and a strong Australian dollar.

Debelle also noted that some firms had been less willing to take risks since the financial crisis, choosing to reduce debt and increase cash holdings rather than invest.

Australian non-mining investment in real terms was currently around 17% higher than at the start of 2008, Debelle said. Investment in the US was up by about the same amount, while in the UK it has risen by 13% and by 3% in Japan. Spending in the euro-area was still 4% lower.

Cutting costs has been “top of mind” for businesses over the past decade, and any moves to boost investment and hire people should ultimately absorb spare capacity

and get bosses thinking about pay increases, Debelle said. A potential downside risk would be wage growth remaining stubbornly low despite higher levels of investment, he said.

“The fact that we’re starting to see a change in mindset from the corporate sector around the willingness to invest, around the willingness to hire, gives you some hope that eventually we might get into a world where we start to see those wage price pressures emerge,” Debelle said in a question and answer session following the speech.

Debelle then reiterated the central bank’s view that interest rates would only rise from a record-low 1.5% once wage increases and inflation were stronger than where they are now, especially in an environment where households were saddled with record-high private debt.

“Are we just going to jack up rates to see how the household sector lives with that? I don’t think so,” he said. “If rates were materially higher, then the household sector would have trouble servicing their mortgages — we know that — and you have to think about what the environment is that rates are going to be going up in, it’s going to be an environment where the economy is stronger.” — Bloomberg