Australian business investment is still looking soft

David McNew/Getty ImagesHere it is.
  • Australia’s latest private-sector capital expenditure (CAPEX) report was a little soft with both actual and expected spend falling short of market expectations.
  • Investment on plant, machinery and equipment — a direct input into Australia’s Q1 GDP report released next week — jumped by 2.5% and will add to economic growth.
  • Expected spend by non-mining sectors next financial year rose less-than-expected, casting some doubt towards the rosy outlook offered by the Reserve Bank in recent commentary.

Australia’s March quarter private-sector capital expenditure (CAPEX) report has fallen short of expectations, dragged lower by weaker investment in buildings and structures.

According to the Australian Bureau of Statistics (ABS), CAPEX rose by 0.4% in seasonally adjusted chain volume terms, missing expectations for an increase of 1%.

From a year earlier, CAPEX increased by 3.7%.

The prior quarter’s expenditure figure, previously reported as a decline of 0.2%, was revised down to show an increase of 0.2%.

The CAPEX survey captures around 60% of total business investment, excluding spending from industries such as agriculture, health and education. That means it only provides a partial indicator on total investment during the quarter.


Investment on plant, machinery and equipment — a direct input into Australia’s Q1 GDP report released next week — jumped by 2.5% and will add to economic growth during the quarter.

However, as indicated by last week’s construction work report, that only partially offset a 1.3% drop in building CAPEX over the same period.

From the March quarter of 2017, spend on plant, machinery and equipment rose by a solid 9.3%, overriding a 0.6% drop in expenditure on buildings and structures.

By sector, mining CAPEX rose by 1.2% over the quarter, offsetting weak results for manufacturers and “other select industries”, predominantly Australia’s services sector.

CAPEX at the former fell 3.5% while the latter rose by a modest 0.5%. Both were dragged lower by weaker investment in buildings and structures.

As the services sector makes up the majority of expenditure, this does suggest some downside risk in the March quarter GDP data released next week,” said Sarah Hunter, Head of Macroeconomics at BIS Oxford Economics.

Earlier this month, the RBA said that an “increasing proportion of businesses have been reporting that constraints on output were coming from premises and plant limitations”, adding that non-mining business investment had been “growing strongly”.

Today’s report casts some doubt about that assessment.


Looking ahead, the second estimate for 2018/19 CAPEX spend rose to $87.7 billion, an increase of 5.7% on the first estimate. However, that fell short of the $90.5 billion level expected by economists.

Expected expenditure from other selected industries rose to $53.9 billion, an increase of 5.2% on that indicated three months earlier.

Investment intentions among manufacturers also increase, lifting 2.5% from the first estimate to $7.06 billion.

Combined, expected spend from Australia’s non-mining sectors next year rose to $61 billion.

Before the CAPEX report was released, ANZ Bank said a figure $61 billion or lower would be regarded as soft outcome.

“Strength in business conditions, rising capacity utilisation and broadly positive data flow over recent months are all expected to support a solid investment outlook,” it said before the release.

The Commonwealth offered a similar view, suggesting anything below $63 billion would regarded as a disappointing result given strength in Australian business conditions and confidence seen over the past year.

“Non-mining investment has lifted over the past 1.5 years and policymakers will want to see that trend continue, particularly as the unemployment rate has been stuck at 5.5% over the past nine months,” the CBA said.

The second estimate for non-mining investment did increase, just not by as much as some were expecting given evidence of capacity constraints and elevated confidence and operating conditions.

“The rise was in line with revisions in recent years, but it was weaker than the consensus forecast and a little surprising given the strong rates of business confidence. This was due to a smaller than normal upward revision to non-mining CAPEX, ” said Kate Hickie, Economist at Capital Economics.

Looking ahead, Hickie suggests this trend may continue.

“It is probably too soon for planned CAPEX to be influenced by the Royal Commission, but a tightening in credit standards for businesses could limit the recovery in investment,” she said.

Accounting for the remainder of the second estimate for total CAPEX next year, mining spend rose to $26.8 billion, an increase of 7.7% from that offered in the December quarter.

The sixth estimate for the current financial year was revised up to $117.5 billion, 2.8% higher than the figure offered a quarter earlier.

Financial markets have deemed the report to be a little soft, selling down the Australian dollar and bidding up Australian government bond futures.

However, the reaction has not been significant by any stretch, perhaps reflecting that a raft of GDP inputs will be released next week ahead of Australia’s actual GDP report on Wednesday.

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