Australia central bank optimistic on business investment

SYDNEY (REUTERS) - The stars are aligned for Australia to see a gradual recovery in non-mining business investment over the next year or so as the long boom in the resource sector finally plateaus, a top central banker said on Wednesday.

In a guardedly optimistic speech on investment, Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent said the high level of the local dollar complicated the outlook somewhat, though he also saw benefits in a strong currency.

"Our expectation is that there will be a gradual recovery in non-mining business investment and further moderate growth of dwelling investment," said Mr Kent, who heads the central bank's economics department.

That expectation is one reason the central bank has led interest rates steady at 3 percent at its last three policy meetings, having cut by 150 basis points last year.

Yet, there was also a caveat.

"While many of the drivers of investment support such an outlook, and low interest rates are playing their role, the profile for non-mining business investment remains uncertain, including because of the high level of the exchange rate." The Australian dollar hit a three-month high on its US counterpart this week, while reaching a 28-year peak in trade-weighted terms.

Mr Kent said the pieces were in place for a recovery in investment outside of mining. Interest rates were low by historic standards and most firms had access to adequate funding on favourable terms.

"There are signs that the low level of interest rates is having some of the expected effects and these are likely to have further to run," he said.

Low rates and rising assets prices had also boosted household wealth which in turn was lifting consumption and home building.

"Indeed, the stronger retail sales data since the beginning of the year support this outlook. Higher consumption growth will also help to support business activity and investment."

Retail sales grew far beyond all expectations in January and February while consumer confidence also improved markedly.

Mr Kent noted that while the lofty level of the local dollar was hurting some sectors, it also made capital imports cheaper.

"This will benefit firms investing in machinery and equipment, which constitutes a large share of non-mining business investment." Furthermore, a sharp increase in migration had lifted population growth to a brisk 1.7 percent a year which should lift demand of everything from homes to healthcare and education.

And while mining investment may crest this year, that did not mean spending would suddenly fall off a cliff, said Kent. In particular, there was a vast pipeline of liquefied natural gas projects underway that would run for some years yet.

"This means that the level of mining investment is likely to remain quite elevated for a time." The sums involved are huge.

Mining investment should reach 8 percent of Australia's A$1.5 trillion (S$1.9 trillion) in gross domestic product (GDP) this year, up from its historic average of less than 2 percent.

"Pulling all of this together suggests that growth for the economy as a whole will be a little below trend this year and then pick up gradually through next year," Mr Kent concluded.