Rebalancing facing obstacles

Over three years on from the peak in resource prices, Australia's fabled rebalancing is still struggling to build momentum, with business confidence edging back, and signs of weakness emerging in the building sector.

The National Australia Bank latest business survey published on Thursday showed confidence was close to its long-run average.

"However, our monthly survey shows that the momentum has turned, with confidence easing steadily over the quarter," NAB's economic research team said in the report on Thursday.

But long-run average confidence levels are nothing to write home about.

They take in slumps, slowdowns and recessions as well as periods of strong growth, so should be seen as below normal for a well-performing economy.

The same survey showed business conditions - an average of measures of profitability, trading conditions, and employment - had also waned.

"Forward orders eased, suggesting sluggish domestic demand to continue in the near term," the NAB team said.

"This is consistent with average rates of capacity utilisation, but suggests a lack of urgency for firms to invest - much stronger non-mining investment will be needed to achieve trend growth in domestic demand."

Investment in the non-mining sector will be crucial to wean the economy off dependence on mining and onto a more broad-based pattern of growth.

This shift has been variously described as rebalancing, handover, baton change and transition, often with an unstated assumption that it will happen automatically.

But whatever it's called, the NAB's survey suggests it's not proceeding all that smoothly.

One of the key elements of the rebalancing is widely expected to be housing construction.

This week Guy Bruten, Asia/Pacific senior economist for funds manager AllianceBernstein, said the surge in housing construction encouraged by low interest rates and rising prices might soon run out of steam.

"Come mid-2015, the lion's share of the upswing will be done," he said.

If so, it would be one reason the RBA might consider cutting interest rates again.

But another part of the building sector, one typically getting less attention from economists, is non-residential building - offices, shops, hotels and the like.

"Strikingly, (non-residential) building approvals have lost considerable momentum over recent months, reversing earlier strength," Westpac economist Andrew Hanlan said in a report released on Thursday.

The trend is most pronounced in the mining states of Western Australia and Queensland, but private sector approvals have fallen in other states as well.

"This down step in private approvals points to a cooling of building conditions in 2015," Mr Hanlan said.

This suggests that the transition away from mining will continue to run into the occasional obstacle.

Not that it was ever guaranteed to be seamless.

RBA governor Glenn Stevens acknowledged that in March, saying there was an unavoidably wide band of uncertainty around the central bank's forecasts.

"The fact is that no one can say with certainty just how smooth a 'handover' will occur," he said at the time.

"Nor can anyone pretend to be able to fine-tune it."