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Business investment set to boom in 2011

A pick-up in business investment is forecast to drive Australia's economic growth next year, according to the ABE Executive Committee

December 9, 2010

A pick-up in mining related business investment is expected to drive Australia’s economic growth by 3.5 percent in 2011, according to the country’s leading economists.

The Australian Business Economists (ABE) Executive Committee met in Sydney yesterday afternoon to discuss the results of its annual survey, which provides a positive outlook for the economy.

The Committee expects Australian growth to remain strong, with median GDP growth rising from 3.3 percent in 2010 to 3.5 percent in the New Year.

Business investment is forecast to increase by 13 percent in 2011 and 11 percent in 2012 – mainly driven by the booming mining sector.

With a large proportion of Australia’s capital equipment being imported, overall imports are expected to be strong, just outpacing the growth in exports to keep net exports negative.

The forecasts are for a 0.5 of percentage point detraction from GDP growth in 2011 and a 0.2 of a percentage point detraction in 2012.

That said, exports are forecast to increase by a median of 5.8 percent in 2011 and 6.7 percent in 2012.

Other survey highlights reveal household consumption is forecast to remain solid but not return to pre-GFC growth rates.

Higher interest rates, some ongoing deleveraging and a more cautious attitude to spending results in a forecast for household consumption growth of 3.3 percent in 2011 and 2.7 percent in 2012.

However, this pace of spending growth is closer to the average over the current 18-year period of Australian economic expansion.

Dwelling investment is forecast to slow, going from an estimated 4.9 percent in 2010 to 3.8 percent in 2011 and 2.5 percent in 2012.

Meanwhile, employment is expected to grow more in-line with labour supply.

Employment growth in 2010 is expected to be 2.6 percent and the median forecast is 2.5 percent in 2011 before moderating marginally to 2.1 percent in 2012.

Inflation is forecast to be at the top of the RBA’s 2 percent to 3 percent target band across the forecast horizon, according to the ABE Committee.

“With an economy that is growing strongly, the Federal Government’s headline budget deficit will shrink,” it says.

The improvement should result in a reduction from -$56.5 billion in 2009-10 to -$35 billion for 2010-11 before reducing further to -$6.5 billion by the end of 2011-12.

The median forecast of the Committee is for the cash rate target to be 4.75 percent at June 2011.

However, a further 75 bps of tightening is expected over the subsequent six months, which would take the cash rate target to 5.50 percent.

From this point to the end of 2012, the Committee’s median forecast was for one further 25 bps hike that leaves the cash rate target at 5.75 percent.

Finally, the Australian dollar is forecast to depreciate against the US dollar and on a Trade Weighted Index (TWI) basis in 2011.

The median forecast of the Committee is for the exchange rate to be at parity with the US dollar and 73 points on a TWI basis at June 2011.

After this date, the median forecast is for a decline to USD 0.93 and 70.5 points respectively by December 2011 and for further moderation to USD 0.87 and 65.5 points respectively by end of 2012.

Among the ABE Executive Committee is Colonial First State Head of Investment Markets Research, Stephen Halmarick; ANZ Chief Economist, Warren Hogan; UBS Chief Economist, Scott Haslem; and Citi Senior Economist Investment Research and Analysis, Josh Williamson.

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