Australian business is finally investing

In Pictures Ltd./Corbis via Getty ImagesBuildings and structures Capital Investment.
  • Australian business investment rose strongly in the December quarter, snapping a run of three consecutive declines.
  • Investment on equipment, plant and machinery rose by 0.7%, and will add to Australian Q4 GDP.
  • Investment at services firms was entirely responsible for the quarterly increase, masking steep falls in mining and manufacturing investment.
  • Expected investment in the current financial year was revised higher, an outcome that should help to underpin economic growth in the coming quarters if replicated in reality.
  • The first estimate for investment in 2019/20 rose to $92.1 billion, higher than markets expected. Mining firms are feeling particularly confident and willing to invest again.

Australian business investment rose strongly in the December quarter of last year, providing a much-needed boost to GDP.

According to the Australian Bureau of Statistics (ABS), private sector capital expenditure (CAPEX) rose by 2% in seasonally adjusted chain volume terms to $30.1 billion, topping forecasts for a smaller increase of 1%.

Investment had previously fallen in each of the prior three quarters.

From a year earlier, CAPEX rose by 1.9%, driven by strong investment in plant and equipment.

The CAPEX survey captures around 60% of total business investment, excluding spending from industries such as agriculture, health and education. It therefore captures most investment, not all investment.

Within that total, CAPEX on buildings and structures rose by 3.2% to $16.1 billion. Despite the quarterly increase, investment in this category still fell by 2.9% from a year earlier.

Investment on equipment, plant and machinery rose by a smaller 0.7% to $14 billion, leaving it up an impressive 8.1% from the same quarter a year ago.

The quarterly increase in this category will flow through directly into Australia’s Q4 GDP report next, adding a welcome boost after a string of soft readings on retail spending and construction in the December quarter. However, the contribution will only be small, meaning the risks to GDP are still slanted to the downside at this point.

The details of the report will please the Reserve Bank of Australia (RBA) who are banking on an increase in business investment, particularly from non-mining sectors, to help underpin economic activity in the coming years.

By industry, all of the strength during the quarter came from the category known as other selected industries, predominantly services.

CAPEX in this category jumped by 5.6% to $19.8 billion, leaving it up 9.1% from a year earlier.

In contrast, CAPEX at mining and manufacturing firms slumped by 4.3% and 4.4% respectively to $7.9 billion and $2.35 billion. The quarterly total for mining was the lowest since the September quarter 2007, reflecting the ongoing unwind of Australia’s mining infrastructure boom.

From a year earlier, CAPEX at mining and manufacturers fell by 11.5% and 2.1% respectively.

Looking ahead, the first estimate for CAPEX in 2019/20 came in at $92.1 billion, ahead of the $90.5 billion level expected by financial markets.

The figure was 11% higher than the first estimate offered for 2018/19, the current financial year.

Expected CAPEX tends to be revised higher over time as operating conditions become more certain for businesses. As such, that means initial estimates are often unreliable. However, a beat on this forward-looking measure is regarded as good news.

ABS

Within the first estimate for nest year, expected CAPEX at non-mining sectors came in at $62 billion, below the $65 billion level that economists at Commonwealth Bank suggested would be a strong result.

Intended investment at manufacturers rose to $7.25 billion, some 5.2% higher than the first estimate offered for the 2018/19 financial year. For other selected industries — predominantly services — estimate one came in at $54.7 billion, up 6.8% from a year earlier.

The big surprise came from the mining sector with expected CAPEX jumping to $30.2 billion, up a hefty 21.4% from the same survey a year earlier.

Strength in commodity prices likely played a role in the size of the upgrade.

Estimate five for the current year (2018/19) was also revised higher to $118.4 billion, 4% more than the prior estimate and 3.6% higher than the fourth estimate for the 2017/18 financial year.

Prior to today’s report, CBA said a figure in excess of $120 billion would be a strong result, and an upgrade from the fourth estimate. Anything less would be deemed to be disappointing. Economists at Westpac said a figure of $118 billion would be a par result.

“The latest estimate for spending this financial year was 4% higher than the previous one, which suggests that the RBA’s current forecast of around 5% growth for the year is within reach,” said Sarah Hunter, Chief Australia Economist for BIS Oxford Economics.

“There was more good news for the medium term, with the first estimate for 2019/20. Mining drove the gain, but Other Industries also performed strongly, suggesting that the positive momentum in business investment is broad-based.”

Hunter says the report has confirmed that business investment will be supportive for growth this year, and consistent with her forecast for the Australian economy to grow by 2.5%.

After a strong of weak Australian data releases, raising concern about a more pronounced slowdown in the broader Australian economy, Kristina Clifton, Senior Economist at the Commonwealth Bank, said today’s report “gives us confidence that decent growth figures can be achieved in 2019”.

“Today’s CAPEX result was a good one,” she said.

“Spending plans came in broadly in line with our expectations, and are consistent with a solid lift in non-mining capex in 2018/19 followed by a more modest lift in 2019/20.”

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