The Reserve Bank has revealed that business investment in Australia is weaker than it had been anticipating, as part of its justification for July’s interest rate cut.
Minutes from the monthly board meeting, released on Tuesday (16 July), reveal the board expressed concern at a waning private sector when it opted for back-to-back rate cuts in July.
“The national accounts reported that the domestic economy had grown by 0.4 [of a percentage point] in the March quarter,” the minutes state.
Members noted that significant government spending on infrastructure as well as the roll-out of the National Disability Insurance Scheme (NDIS) and greater spending on the Pharmaceutical Benefits Scheme (PBS) by the federal government have been propping up Australia’s economy.
By contrast, the private sector remains in recessionary territory.
“Private demand had contracted for the third consecutive quarter because there had been further falls in mining investment and housing construction. Consumption growth had remained subdued,” the minutes said, adding that the 1.8 per cent consumption growth over the year to March was “well below average”.
“Growth in business investment had been weaker than expected in the March quarter.”
The minutes continued: “In the main, surveyed measures of business conditions had declined to around or a little above average levels. However, both the retail and transportation sectors had experienced well below average conditions.”
Non-mining business investment had continued to grow in the March quarter, the board said, largely thanks to non-residential construction, but that investment in machinery and equipment had fallen.
The opposite was true in the mining sector, with investment predominantly focused on machinery and equipment.
Drought bites hard
The RBA board said that exports had increased in the quarter, “primarily driven by growth in rural and service exports”.
Although rather than a bright spot for the economy, this was driven by drought conditions in much of the country.
According to the minutes, the drought is causing farmers to sell their livestock, and they are doing so at a faster rate than crop exports are falling.
Retailers struggling to adapt
Members of the RBA board also had “a detailed discussion” about the retail sector in particular, the minutes show, and the effects of competition from both foreign players and online merchants entering the local market.
“The increase in the supply of retail items and lower retail prices in response to increased competition were positive developments for consumers, other things equal,” they said.
“Many retailers and wholesalers had also become more efficient in response to more intense competition, often using new technology (including in logistics), which had resulted in relatively rapid multifactor productivity growth in these sectors.
“[However,] members noted that the adjustment in the retail sector had been protracted and had put downward pressure on inflation for some years. In the more recent period, the effects on prices of greater competition had been difficult to separate from the effects of the prevailing weak demand conditions.”
Working more, but not earning more
The bank board also reviewed wages growth, and found that strong employment growth is still failing to translate in higher earnings.
“Growth in labour income had been driven by strong employment growth and that growth in hourly earnings had remained subdued,” the minutes stated.
“New private sector enterprise bargaining agreements had incorporated slightly faster wages growth than agreements reached a year earlier. However, wages growth for workers on existing enterprise bargaining agreements had remained subdued.”
They added: “There [is] little prospect of a near-term pick-up in public sector outcomes given the ongoing wage caps.”
Employment growth is failing to address “spare capacity” in the labour market, the central bank said, with newly jobs added being absorbed by more people staying at work, causing the participation rate to hit “its highest level on record”.
The RBA board will next meet on Tuesday, 6 July 2019.
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