If you haven’t heard of the Australian private new capital expenditure and expected expenditure report perhaps you should.
It’s probably the most significant economic data release outside of GDP and CPI in determining Australia’s interest rate outlook.
The ABS report, essentially a snapshot on business spending, looks back at business expenditure but, importantly, tries to estimate forward intentions too.
In recent years it has been slipping, and fast. To give you an indication of just how quickly the first estimate of business expenditure for 2012/13 totalled $165.892 billion. For the first estimate for 2015/16 expenditure that figure plummeted to $109.799 billion.
That’s a decrease of 33.8%, or $56 billion, in just four years.
Expenditure across the mining sector, the vast majority of total spending up until recently, has dropped substantially from its highs of 2012/13. Back then the first estimate for expenditure totalled $A113.396 billion, some 68.4% of total business spend. Fast forward to 2015/16 and that figure has fallen to just $A60.233 billion, a decline of 46.9%.
That represents a problem, a big problem. What can possibly can help to offset a decline of that scale?
While it was never going to be enough to fully offset the drop in mining expenditure, many – the RBA included – were looking for expenditure across manufacturing and “other” sectors – namely services – to accelerate.
They dropped interest rates to lower borrowing costs which, in turn, helped to lower the Australian dollar in an attempt to boost business spending.
However, despite the best efforts of the RBA, there has been little to no evidence that expenditure in these sectors is accelerating.
Only last week RBA deputy governor Philip Lowe stated that it “is taking place more slowly than we had earlier expected”.
Here is a snippet from Lowe’s speech on what he believes is holding investment back, followed by a chart showing non-mining business investment as a percentage of Australian GDP. (Emphasis added.)
“As a share of GDP, non-mining business investment remains just above the levels reached in the recession of the early 1990s. For a few years now, each time we have updated our forecasts, we have pushed out the timing of the recovery in this part of the economy. The latest update was no different. Many businesses tell us that while conditions are okay at the moment, they are not sufficiently strong for them to lift their investment plans. Many feel uncertain about the future and so are waiting until there is a sustained pick-up in demand before committing to new capital expenditure.
There is no single factor driving this tendency to wait and a similar story seems to be playing out in many other advanced economies. Around the world, many businesses seem concerned about the prospects for consumer demand given high levels of debt and the ageing of the population. There is also uncertainty about what type of capital investment is appropriate in a world where new information technologies are reshaping business models. Many firms also see globalisation of markets as a challenge, especially where increased competition has reduced market power”.
Lowe suggested that an acceleration in non-mining investment “remains the critical ingredient to stronger growth in the overall economy and to a successful transition”. Given there was no indication of this in the March quarter, it also goes a long way to explaining why the RBA dropped interest rates in May.
Reflective of that view, ANZ’s chief economist Warren Hogan suggested on Tuesday that “the outlook for business investment is now one of the main factors influencing consumer confidence in Australia. In this regard, we keenly await Thursday’s CAPEX numbers, including the survey of capex expectations”.
In other words, the outlook for business expenditure is highly influential on consumer confidence which, in turn, is highly influential on the biggest contributor to economic growth in Australia, household consumption.
It’s easy to see why. If businesses are spending it’s a sign of confidence in the economic outlook. That, as a result, will help boost consumer confidence. Concerns about job security will diminish and help spur increased consumption. Those two factors alone, given they make up the vast majority of Australian GDP, will almost certainly help to boost economic growth as a consequence.
While it may be too soon to see an improvement in 2015/16 expenditure plans in the March quarter expenditure report (although, on average, the second estimate has been 7.8% higher than the first in the history of the survey), don’t be surprised if the markets react strongly to the figure.
No improvement, or even a small improvement, will see expectations for policy easing jump markedly while a strong uplift, something crucial to economic growth in the years ahead, will see many close the book on the potential for further rate cuts from the RBA.