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Downside risks in Australia's capital expenditure and government spending

The decline in resource investment remains one of the more powerful influences on economic growth, and so a further decline in non-residential investment looks highly likely. However, weaker mining investment is expected to be partly offset by stronger investment expenditure in non-mining sectors, consistent with business sentiment data as well as a firmer trend in credit to the business sector. 

Some additional downside comes from the fact that in Q2 non-residential investment expanded 0.8% qoq in what was the first gain in 11 quarters. However, residential investment should continue to support growth in light of strong approvals data over the past year and the surprising 1.1% qoq decline reported for Q2. Given the volatility of private sector investment, any short-term forecast can at best be tentative, but the greatest decline expected in four quarters, meaning that the risks to this forecast to be balanced.

Another case of possible payback after unexpected and out-of-trend gains is public expenditure. Public sector gross fixed capital investment grew 4.0% qoq in Q2, and general government gross fixed capital investment surged 11% qoq. A pull-back therefore seems highly likely. In a similar vein, the 2.2% qoq increase in Q2 public consumption also looks excessive, and a small decline is expected in Q3.

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