The charts below look at each of these components by contribution to YoY growth. The interpretation of these data is that if investment added 2ppt to GDP growth of 4%, investment would be 50% of growth. This is different from its proportion of GDP.
This first shows the contribution of private sector investment to GDP over the past 20 years. This includes dwelling investment (or housing construction) and investment by businesses in infrastructure, commercial building, machinery equipment and other fixed investments.
The key aspect of this chart is that the light blue non-dwelling investment component has been extraordinarily strong in the past few years, which is largely infrastructure projects related to the mining boom. Investment elsewhere has slowed to a trickle or is a drag on growth in the case of housing construction.
For many this chart defines the key policy challenge of the next few years. Mining investment will taper, taking a huge chunk out of GDP growth. The hope is that dwelling construction can help fill the void, although historically it has never been as big a portion of growth as infrastructure investment is today. Whether growth can be kept on an even keel will large depend on how rapidly mining investment slows.
It won't be purely up to housing to fill the hole left by mining investment, as the building of ports, mines and railroads is ultimately to export more commodities. Subsequently exports should rise once projects are completed, although again this won't be enough to fill the gap.
Household consumption will slow, although it unusual for it to be a drag on growth. Interestingly, consumption was much weaker in 2008/09 that it was during the recession in the 1990s. And this weakness was evident before the financial crisis, with very high interest rates doing the damage. To be sure, at the time there was a concern that monetary policy was "pushing on string" leading into 2008, with the subsequent crunch to consumption perhaps providing a backdrop to the current concerns about policy effectiveness.
Imports are a function of domestic activity and should fall if investment and consumption falls. This would be an even larger buffer if the currency was also to fall, but the strength of the A$ is now just as much about the problems elsewhere in the world than about Australia. This provides a unique policy challenge since the currency has been floated.
Government activity can be divided into consumption, which is the provision of services, and investment which is things like roads or public hospitals. Government investment has been a drag on growth for sometime and should continue to be given the drive to shift the budget back into surplus.
The final piece of the puzzle is relatively small but can have a big impact on growth: change in inventories. As GDP is a production measure, the requirement to manage inventory can have a significant impact on growth. For example, if demand is unexpectedly weak as it was in 2008/09, then production is cut much more than consumption has firms drive inventory levels down.
Inventory cycles are a key contributor driving an economy into recession. While this doesn't look likely for Australia yet, certainly the risks are high and the economy is vulnerable.
