There are growing signs that restrictive policy settings are working to establish a more sustainable balance between demand and supply in the Australian economy. Indeed, inflation has continued to underwhelm, retail sales have stagnated and dwellings investment has fallen outright. Admittedly, business investment has shown no signs of slowing and firms seem intent on ramping up capital expenditure even further. However, to the extent that capital deepening provides a much-needed boost to labour productivity, we suspect the RBA will welcome the ongoing strength in fixed investment growth.
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