• The transition from mining to non‑mining led growth is on track.  Next week’s data on housing lending, consumer sentiment, construction, employment and dwelling starts will provide further detail on the transition.
• US non‑farm payrolls could be stronger than expected.  Employment data is key for Fed tapering decisions over 2014.
• Other important US data over the week ahead are retail sales, CPI and industrial production.

Welcome to 2014! The Australian data flow has begun the new year quite positively with signals that the transition to non‑mining led growth is proceeding as loose monetary policy continues to work its way through the economy.  Our outlook for the Australian economy and financial markets for 2014 is included in the Perspective.

In Australia, housing‑related data points are expected to show that the recovery in the housing market is firmly entrenched. Total housing lending to owner‑occupiers and investors looks like it continued to increase in November, rising by around 4%.  The ABS’ QIII building activity release will detail the number of dwelling starts over the period.  We are looking for a 1% increase in commencements in QIII.  A surge in approvals towards the end of QIII and start of QIV will see stronger levels of commencements in the periods ahead.

The January reading of consumer sentiment may pick up given anecdotal evidence of solid retail sales growth over the Christmas period.  Stronger than expected retail sales data this week indicates that the period of weak retail outcomes are easing thanks to prior cuts to the cash rate and rising house prices.  Consumer unemployment expectations are likely to remain elevated while there are highly publicised news around large job losses.  The December employment report is the key release next week.  We expect modest jobs growth around 11K in the month The overall trend in employment growth has been soft.  But, despite this the unemployment rate has hovered around 5¾% due to a falling participation rate.

The engineering construction data provides additional detail on work done over the period.  The data provides useful information on mining capex and the progress of non‑residential construction, which is key for the non‑mining outlook.

New Zealand data includes the NZIER quarterly survey of Business opinion which should show a decent improvement in business confidence in line with the strengthening seen in the ANZ survey.  NZ retail card spending should show another lift, indicating a strong end to the year.  The outlook for the New Zealand economy in 2014 is included from page eight.

The Japanese current account is likely to be a deficit around ¥150bn.  This would be the third consecutive current account deficit for Japan.  The deterioration in the Japanese current account is one of the factors contributing to the depreciation in the Japanese Yen.

Tonight, the US non‑farm payrolls are expected to print around 197K, in line with recent outcomes.  The strong ADP employment report released earlier this week suggests an upside risk to December payrolls.  The unemployment rate looks like it will remain at 7.0%.  Outcomes in the labour market will be key for the Fed’s tapering decisions this year.

US advance retail sales are published next week and are expected to show a more modest rise in December following a strong outcome in the previous month.  December US CPI is expected to pick up thanks to rising fuel prices.  Annual core inflation however should stay sub 2%.  The pace of industrial production growth is expected to moderate in December given recent trends in the ISM.  The Fed also release their Beige Book which provides analytical insights into economic conditions in each Fed district and sectors of the US economy.

The only major Eurozone release is November industrial production.  The strong lift in German industrial production in November and the improvement in the Eurozone PMI suggest a bounce back  in Eurozone industrial production.  UK data includes CPI and retail sales.  UK CPI has eased recently but there may be some upward pressure over the next few months as utility prices have risen.  Retail sales growth should continue to edge higher towards its long‑run average as confidence lifts and the labour market strengthens.

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The positive QIII outcome for actual business capex bettered market expectations which centred on a fall of 1.2%.  The 3.6% rise in capex over the quarter was broad‑based.  Mining capex was up 4.0% while non‑mining investment grew by 3.0%.  The data shows that mining investment is hovering around its peak, while there are tentative signs that the desired lift in non‑mining investment is beginning to occur.   Despite picking up, manufacturing investment is weak as the prolonged effects of a strong domestic currency continue to bite.

The fourth estimate of 2013/14 capex expectations was the market focus from today’s data.  Companies upgraded their expectations for capex spending in 2013/14.  The outcome makes us confident of how the transition from mining to non‑mining led growth will proceed.  Based on today’s numbers, the investment outlook looks a little stronger than that reported three months ago.  Nominal total capex looks like it will rise by around 1% in 2013/14.  This compares to the capex survey published three months ago which indicated that capex would fall in 2013/14.

Today’s data does not change our view on the mining investment story.  The fourth estimate of mining capex plans for 2013/14 came in a little better than we were expecting.  Mining investment was just under 8% of GDP in 2012/13 and we remain comfortable with our long‑held view that mining capex will plateau at a similar amount in 2013/14.  The real drag on GDP growth from falling mining capex looks to be some time away.  By this time, growth in the non‑mining economy is expected to have picked up noticeably.  The resilience in mining capex expectations indicates that the period of large project cancellations looks to have largely finished.  In our view, the mining outlook is stronger than that indicated by the RBA in its latest Statement on Monetary Policy. The RBA downgraded their 2014/15 growth forecasts based on an expectation that mining investment will fall more than previously anticipated.

The more pressing concern at the moment is how the non‑mining story will play out.  Non‑mining capex expectations for 2013/14 were the stronger part of the story today.  Non‑mining capex now looks like it will grow marginally in 2013/14.  The previous estimate indicated a 5% fall in non‑mining capex over 2013/14.  Timing is important when analysing the capex survey.  The latest capex survey was taken over October‑November.  During this time, business confidence rebounded noticeably.  The Aussie dollar appreciated in October and then fell, now trading at just over USD0.91.  Most commentators expect the Aussie dollar to move lower so it is likely that companies saw the appreciation in the currency as temporary.

We have pointed out for some time that the ABS capex survey has some limitations when assessing the outlook for non‑mining capex.  The capex survey excludes some large non‑mining sectors including agriculture, health care & social assistance and education & training.  Capital spending in these excluded industries has been robust.

We have analysed the pipeline of non‑mining work based on data from the Deloitte Access Economics Investment Monitor.  Based on this data, we have calculated that the total value of definite non‑mining capex projects that exists in the pipeline is $138bn.  This equates to just over half of the total value of definite mining projects at the moment.  This is a significant pipeline of non‑mining work that exists and should provide a significant offset to the looming “pothole” left by the end of the mining construction boom.  The first indicators of higher spending activity in the non‑mining sector will be through lending data.  Current levels of commercial finance are turning up which has historically been a good indicator of non‑mining investment activity.

Today’s figures do not alter our thinking on the outlook for interest rates.  Any further rate cuts run the risk of overstimulating the housing market without gaining the desired “rebalancing” of growth.  The RBA’s preference is for further stimulus to come via a lower Aussie dollar.  We believe that the RBA is a reluctant rate cutter and continue to see the current 2.5% cash rate as the low point in the current cycle.  We expect the RBA to remain on hold at next week’s Board meeting.

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