Australian business investment is about to tank

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Australian business investment rose unexpectedly in the final quarter of last year, partially offsetting an ugly estimate for business spending in the year ahead.

According to figures released by the ABS, business capital expenditure (CAPEX) increased by 0.8% to 31.941 billion in seasonally adjusted terms, a sharp improvement on the 9.2% decline registered in the prior quarter.

While slightly ahead of expectations for a drop of 3.0%, expenditure was down 16.4% on the levels of a year earlier.

Spending on equipment, plant and machinery – a direct GDP input – increased by 0.1% to $11.54 billion, slightly ahead of expectations for flat growth during the quarter. From a year earlier it slid by 12.4%.

Elsewhere CAPEX devoted to building and structures rose by 1.2% to $20.4 billion, leaving it down 18.5% from the December quarter of 2014.

The year-on-year figures are largely reflected of the continued unwinding of the mining investment boom, along with subdued business spending in non-mining sectors.

The chart below, supplied by the ABS, reveals the sharp acceleration in business spending during the peak of the commodities price boom, along with the recent decline in spending led by the mining sector.

While the backward-looking data was reasonable, that looking forward was anything but. It was horrible.

The fifth estimate for 2015/16 CAPEX came in at $123.956 billion, down 0.6% on the upwardly-revised fourth estimate released in the previous quarter.

The first estimate for 2016/17 – perhaps the most closely watched part of today’s release – tanked, falling to just $82.572 billion. The figure was down 19.5% on the first estimate offered for 2015/16, and well below expectations for a smaller decline to $93 billion.

The chart below from the ABS shows the steep decline between the first estimate offered for 2015/16 and that for 2016/17.

Although the backward looking data was solid if not spectacular, the forecast expenditure measures – particularly for 2016/17 – were weak, offering little indication that non-mining industries are taking up the slack left by the sharp decline in mining investment.

By industry, the first estimate for mining sector CAPEX came in at $34.351 billion, down 36.2% on that offered for 2015/16.

Other industries – namely services – indicated that spending would come in at $41.641 billion, down 2.5% on the first estimate of a year earlier. Surprisingly, expected expenditure by manufacturing firms increased to $6.58 billion, up 9.3% on 2015/16.

Combined, expenditure by non-mining sectors is expected to be a tick over $48 billion, below the $49 billion figure deemed by ANZ economists to be weak.

While the first estimate offered for each financial year is highly speculative, and prone to upward revisions as the investment outlook for firms becomes more certain, the scale of the decline certainly adds to risks of further rate cuts from the RBA in the period ahead.

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