Why is non‑mining business investment so weak and what is the outlook?

• A lift in non‑mining investment remains the missing ingredient in the Australian economic growth transition story.
• Some of the cyclical drivers of business investment have moved in a direction that favours a lift in business capex.
• But there are other forces at play which are holding back non‑mining capital investment.
• We expect weak non‑mining capex to persist in 2016, though the recent lift in business credit offers a glimmer of hope.

For the past few years, economists and policymakers have assumed that a lift in non‑mining business investment was forthcoming. A trawl through RBA documents and speeches shows that policy officials have been anticipating a lift in non‑mining investment for a few years. And yet despite incredibly low interest rates and a significantly lower AUD, the lift remains elusive. It has felt a lot like waiting for Godot.

Fortunately, however, there has been a greater than expected pickup in services activity which has generated a fall in the unemployment rate despite weak non‑mining capex. This has supported the economy and employment growth over the past two years. But for the productive capacity of the economy to lift over the longer term, a lift in business investment outside of the resources sector is required.

In this note we ask the question why non‑mining business investment has been so weak. We propose a number of reasons why we are yet to see a lift in capex. And we argue that the reason for a lack of investment goes beyond the level of interest rates and the AUD ‑ these cyclical drivers of business investment are at levels that support rather than hinder investment. Rather, it is a range of other forces at play which are holding investment back. We then take a look at the outlook for business investment in 2016 and what it is likely to mean for growth and monetary policy.

What’s been happening?

There is no shortage of information and literature covering Australia’s mining investment boom. In a nutshell, Australia had a once in 150yr mining investment boom that saw business capex as a share of GDP soar to a record high. During the mining investment period, non‑mining investment fell. But there was an assumption amongst policymakers and economists that non‑mining investment would lift again once mining investment peaked. Low interest rates and a lower exchange rate would help.

The mining investment peak has occurred (late 2012), but since then there has not been a pickup in non‑mining capex. RBA estimates conclude that in the year to QIII 2015, mining investment fell by 28.9% while non‑mining investment fell by ‑0.1%. So non‑mining investment has been flat over the past year which means it has fallen as a share of GDP. Naturally, the question to ask is why? We explore a few possible explanations.