AUSTRALIA'S CAPEX REPORT COMES UP SHORT

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  • Australian capital expenditure (CAPEX) fell in the final quarter of last year with stronger investment on equipment, plant and machinery offset by weaker spending on structures
  • Despite the headline miss, total CAPEX grew by 4% over the year, the strongest increase in five years
  • Expected CAPEX next financial year fell short of expectations despite large increases from Australia’s manufacturing and services firms

Australia’s latest private sector capital expenditure (CAPEX) report has underwhelmed with both current and expected investment coming in below market expectations.

According to the Australian Bureau of Statistics, CAPEX fell by 0.2% to $29.57 billion in seasonally adjusted chain volume terms in the final quarter of last year, missing forecasts for an increase of 1%.

From a year earlier, total investment increased by 4%, the largest increase in five years.

CAPEX in the September quarter of 2017 — initially reported as an increase of 1% — was revised up to show a gain of 1.9%.

The CAPEX survey captures around 60% of total business investment, excluding spending from industries such as agriculture, health and education.

So it captures some business expenditure, but not all business investment.

Spending on buildings fell by 2.1% to $16.2 billion, partially offset by a 2.2% increase in investment on plant, machinery and equipment which rose to $13.4 billion.

The latter will feed directly into Australia’s Q4 GDP report released next week, and will contribute to real GDP growth.

Source: ABS

By sector, the ABS said mining CAPEX fell 4.7% over the quarter, offsetting increases of 2.6% and 1.7% respectively in manufacturing and “other selected” industries.

The latter category is predominantly services firms.

Adding to the slightly disappointing headline result, expected CAPEX for the next financial year also underwhelmed.

The first estimate for 2018/19 came in at $84 billion, slightly below the $86.5 billion level expected.

While slightly below the median economist forecast, it was still 3.5% higher than the fist estimate offered for the 2017/18 financial year.

It was also the first time since the 2012/13 financial year where the first estimate was higher than a year earlier.

Estimate five for the current financial year rose 4.9% to $114.6 billion, reflecting that actual CAPEX tends to be revised higher as operating conditions become clearer to firms. It was also 2.5% higher than the fifth estimate offered for the 2016/17 financial year.

The chart below from the ABS looks at expected CAPEX, shown without shading, compared to actual year-to-date investment.

Source: ABS

Like the headline figure, the details of expected investment in the year ahead were also a little disappointing.

“Other selected” industries — predominantly services — indicated that they intend to invest $51.3 billion over the financial year, up 8.1% from the first estimate offered for the 2017/18 financial year.

Manufacturers estimated CAPEX of $6.9 billion for the year, up 7.1% on the first estimate for the current financial year.

Combined, total non-mining CAPEX for next year stood at $58.2 billion.

While both sectors raised their CAPEX plans from a year earlier, the increase was short of what some economists were looking for.

Before the release of the report, economists at ANZ Bank noted that a figure below $60 billion would be disappointing “as it would imply that the strength in business conditions is not feeding through to longer term investment spending plans”.

When the Reserve Bank of Australia (RBA) met in early February, it said “the prospects for private non-mining investment were more positive than they had been for some time” with investment intentions pointing “to moderate growth over the coming year”.

Suggesting that recent strength in commodity prices is not flowing through to increased investment intentions in the mining sector, expected spend across the sector next year stood at $25.8 billion, 5.3% below the first first estimate for 2017/18.

Although the headline increase in expected CAPEX next year was a bit weaker than markets had been expecting, it comes with the disclaimer that both the first and second estimates are usually quite speculative, asking firms to judge how operating conditions will evolve looking more than a year ahead.

While a mixed December quarter report, Paul Dales, Chief Economist at Capital Economics, said the December result needs to be put in perspective.

“Despite the small disappointment, it is becoming clearer and clearer that investment will increasingly support GDP growth,” he says.

“The key point remains that investment is no longer the Achilles heel of the economy as firms are starting to flex their spending muscles.”

Still, given that other parts of the economy aren’t as strong as the business sector at present, Dales says the early indications suggest Australia’s Q4 GDP report may be a little underwhelming.

“Other parts of the economy aren’t doing quite as well, so it looks as though the 0.6% rise in GDP in the third quarter was followed by something similar in the fourth quarter.”

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