Much of the Australian corporate sector, outside of mining, has been under pressure in recent years as the high AUD, rapidly changing structure of the local and global economies and above neutral interest rate settings in 2011 held them back.
Surveys have suggested that conditions in the business sector as a whole have been slightly below average recently.
This is significantly weaker than the heady days of the mid-2000s. This partly reflects that growth has been very uneven. Without direct exposure to the mining sector many corporations have been struggling.
Business surveys had shown significant weakness in the retail, manufacturing, construction and business services sectors. There has, however, been some recent improvement in reported conditions in the retail and manufacturing industries, consistent with the notion that the negative effect of the high AUD on these industries is starting to wear off. Construction remains very weak up to Q3 2012 though we expect a recovery soon.
Weaker conditions in the non-mining corporate sector have been reflected in falls in business credit, until recently. Miners were doing the bulk of the investment and were cashed up due to rising commodity prices, which has been supporting business investment growth even though but credit growth had been weak. The businesses doing the investment did not need to borrow from local banks.
The positive aspect here is that falling credit has meant that the corporate sector has been deleveraging. Australian listed company gearing rates are at very low levels relative to history. Across the distribution of corporations it is clear that the most highly leveraged have been the ones that have done the most deleveraging. Overall, the corporate sector looks well placed to expand.
At this stage, surveys of investment intentions show no expected growth in non-mining investment in 2013. While this is somewhat disconcerting, there is still time for a pick-up in intentions to materialise. Keep in mind that we see the mining investment share of the economy still increasing until the middle of next year.
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