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Title : Is business investment about to crawl off the mat to save the economy?
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Is business investment about to crawl off the mat to save the economy?

The batting order of the Australian economy is a bit patchy to say the least, with the badly out of form business investment striding nervously to the crease this week.

This week:

• Private capital expenditure (Thursday)
• US GDP (Wednesday)
• OPEC meeting (Thursday)

Long gone are the golden days of capital expenditure during the resources boom when LNG producers alone ploughed $200 billion into the economy building export terminals in Queensland.

Over the other side of the continent the big miners were also spending billions boosting iron ore export capacity. The sheer mass of investment spared the nation the ignominy of recession after the GFC.

With the boom over, and nothing in the prices of the now over-abundant commodities to encourage another spending splurge, capex has been a dead weight on the economy's run rate for years.

Put it together with poor wages growth which has run out domestic consumption and the retail sector, and a property sector past its peak, things look rather wobbly.

Jobs and business conditions continue to hold things together, looking anxiously for support elsewhere.

There is growing optimism business investment might have regained a modicum of form in time to prevent an ugly economic collapse.

There were some positive signs companies were beginning to invest in themselves again during an otherwise disappointing August results season.

The precipitous decline in spending has slowed and a rise in business confidence has seen larger than normal upward revisions in spending plans next year.

Sitting on the sidelines, market economists have pencilled in a modest 1 per cent rise in capex spending for the third quarter (to be released on Wednesday), marginally higher than the 0.8 per cent rise in the second.

A fall in mining investment is again expected to be outweighed by a rise in non-mining capex and give the impending third quarter GDP figure a much-needed lift after last week's inconsequential construction data.

RBC's Su-Lin Ong is a bit more optimistic than the consensus tipping capex growth of 1.5 per cent for the quarter as well as a decent uplift in investment plans for next year.

"We expect the fourth estimate of capex for the current financial year to be revised higher [from $102 billion to $110 billion] continuing the recent trend and consistent with the buoyant nature of the business surveys and confidence," Ms Ong said.

ANZ's David Gradwell may be less optimistic tipping another capex decline, but he is not necessarily pessimistic.

Mr Gradwell forecast that even allowing for a slight capex decline and the disappointing construction figures, third quarter GDP should still grow at around 0.8 per cent for the quarter.

"Our forecasts suggest a continuation of the recent trends in the economy with the baton for growth being handed over from housing to investment," he wrote in a note to clients over the weekend.

With the weak third quarter GDP result from last year dropping out of the equation, over the year the economy should have expanded by a bit more than 3 per cent — which wouldn't be too bad in the circumstances.

China remains a focus for investors

Local investors are likely to endure another week of very mixed feelings about China after recent share market conniptions.

For the bulls, iron ore's second — or maybe third or even fourth — wind continued with the biggest weekly increase in five months.

The bears, with a touch of "I told you so", will point to Thursday's abrupt fall in equities.

At first glance the sentiments appear at odds, but both are driven by the Chinese Communist Party trying to exert control over the world's second biggest economy.

The stock market tumble was prompted by fears not only about China's massive and ever increasing debt, but authorities need to take tougher measures to rein it in.

The iron ore surge is in part driven by efforts to cut both air pollution and inefficient steel producers.

The important point is capacity is being cut, not production.

That is knocking out smaller, older more heavily polluting mills. Bigger, newer ones are still rolling out steel at a fairly hectic pace.

Those mills need higher quality, imported iron ore and that is where the price action is.

The most-actively traded iron ore futures contract on the Dalian Commodity Exchange was up more than 9 per cent last week, while the spot price for 62 per cent content ore jumped almost 4 per cent on Friday, hitting $US67.69 a tonne, its highest level since September.

"With steel futures in China continuing to rise, physical iron ore traders appear to be happy to chase prices higher for the moment," ANZ analyst Daniel Hynes said.

However, the pollution controls may yet have started to bite.

While steel makers are furiously trying to take advantage of higher margins, official data showed only 4 of the 28 major industrial cities targeted to cut pollution levels met their air quality targets last month.

Unlike the winter smog, China's choking debt levels are unlikely to clear anytime soon.

Total debt is now well over double GDP according to the International Monetary Fund. It will be closer to three times as large as GDP by 2022 if its growth remains unchecked.

Thursday's 3 per cent slump on key equity markets is perhaps small beer compared to the 66 per cent gain since 2014, but it is a distinct wrinkle in things.

Chinese authorities may not be too unhappy if the debt fears strains out the riskiest speculators, others may be more worried that once these things get started they gain a savage momentum that now amount of central planning can control.

Markets to focus on tax cuts

Wall Street resumed from its Thanksgiving Day break in reasonable spirits, although things point to a fairly flat opening on the ASX if futures trading is any guide.

Markets on Friday's close:

• ASX SPI 200 futures -flat at 5,993, ASX 200 (Friday's close) +0.1pc at 5,983
• AUD: 76.12 US cents, 63.80 euro cents, 57.06 British pence, 84.94 Japanese yen, $NZ1.11
• US: Dow Jones +0.1pc at 23,558, S&P500 +0.2pc at 2,602, NASDAQ +0.3pc at 6,889
• Europe: FTSE -0.1pc at 7,410 DAX +0.4pc at 13,060Euro Stoxx50 +0.3pc at 3,581
• Commodities: Brent oil +0.3pc at $US63.43/barrel, Gold -0.2pc at $US1289/ounce, Iron ore +3.9pc at $US67.69

Much of the focus this week in the US will be Senate vote on the tax reform bill.

It should just squeak through, but still any tax change remains a long way from being settled.

BetaShares economist David Bassanese noted only two Republican senators need to vote against the plan to kill it.

"That said, whatever the plan's merits, it seems likely they'll all swallow hard and toe the line — or risk the intense wrath of a President that is sill popular in the Republican heartland," Mr Bassanese said.

"One hurdle would remain: both the House and Senate then need to reconcile their different tax cut plans and vote on the resulting compromise bill, which would then likely get Trump support.

"In the meantime, the slow creep to a tax cut plan is helping underpin equity market sentiment."

US GDP and inflation to edge up

Other diary highlights in the US include inflation (Thursday) expected to tick up slightly to 1.4 per cent over the year. Second quarter GDP estimates (Wednesday) may be revised up to 3.2 per cent and Fed chair Janet Yellen delivers a keynote address (Wednesday) which will be scrutinised for any hints about interest rates.

Europe has a couple of key bits of data out both likely heading in the right direction. Unemployment should fall to 8.8 per cent (Thursday) and inflation tick up to a still weak 1 per cent (Thursday).

In China official and unofficial manufacturing PMIs (Thursday and Friday) will be dropped and should continue to show modest expansion.

The oil market will be dominated by an OPEC meeting in Vienna 9Thursday) to discuss the future of production cuts beyond the current expiry date in March. Non-OPEC Russia has signalled it is prepared to continue, but it is not a done deal. No extension would most likely see oil prices tumble.

Apart from business investment, Australia has a few other interesting bits focussing on the housing market being released.

While overall private credit (Thursday) is expected to roll along growing at 5.4 per cent over the year, housing finance may slow in line with a cooling house prices. Business lending is likely to remain weak.

Building approvals (Thursday) are always difficult to pick, but that doesn't stop the market having a stab at -1 per cent for October.

ANZ's Daniel Gradwell is an outlier, suggesting the strength in housing finance should support another rise in building approvals.

"We will be watching Queensland's result closely after the state posted a 40 per cent decline in apartment approvals in September; we expect a solid rebound in October," he said.

Australia

Date	Event	Forecast
Monday 27/11/2017	BHP briefing	Start of a 3-day briefing outlining BHP's strategy and investments
Tuesday 28/11/2017	Origin Energy briefing	Insights into the APLNG project should be the main interest
Wednesday 29/11/2017
Thursday 30/11/2017	Private capital expenditure	Q3: 1pc increase on Q2 and expectations for next year revised up
	Building approvals	Oct: Volatile figures month-to-month, but maybe up a tad
	New home sales	Oct: HIA survey. Fell 6pc in September
	Private sector credit	Oct: RBA, up a bit focus on housing credit, but business lending remains sluggish
	Aristocrat FY results	Net profit of $530 for the gaming machine company expected
Friday 1/12/2017	House prices	Nov: CoreLogic series, likely to be flat with Sydney cooler again
	Manufacturing PMI	Nov: Newish CBA/Markit series. Expanding activity

Overseas

Date	Event	Forecast
Monday 27/11/2017	CH: Industrial profits	Oct: PMIs point to rising profitability
	US New home sales	Oct: Marginal decrease
Tuesday 28/11/2017	EU: OECD economic outlook	Developed nations economic check up. Has been more positive lately
	US: House prices	Sep: Tipped to be a bit softer
Wednesday 29/11/2017	US: GDP	Q3: May have eased up to 3.2pc YoY
	US: Fed speech	Chair Janet Yellen speaks
Thursday 30/11/2017	CH: Official PMI	Nov: Slight expansion in activity
	US: Inflation	Oct: Edging up, but still weak
	US: Personal income/spending	Oct: Still weak, maybe weaker than September
	OPEC meeting	OPEC members are likely to extend production cuts beyond March
Friday 1/12/2017	US: Manufacturing PMI	Nov: Solid expansion in activity
	EU: PMI	Nov: Solid expansion in activity

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