Australian business investment falls, adding to downside risks for GDP

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  • Australian private sector business investment fell unexpectedly in early 2019, adding to downside risks for Q1 GDP.
  • Investment fell across all categories and industries, including in the components that feed directly into the national accounts.
  • Investment in the financial year ahead is now expected to be stronger than initially thought, although the improvement should be treated with caution given uncertainty over operating conditions in the period ahead.

Australian private sector business investment fell unexpectedly in early 2019, adding to downside risks for Q1 GDP.

According to the Australian Bureau of Statistics (ABS), private sector capital expenditure (CAPEX) fell 1.7% to $29.29 billion in the March quarter in seasonally adjusted chain volume terms, undershooting market expectations for an increase of 0.5%.

Over the year, CAPEX fell by 1.9%.

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

By category, investment on buildings and structures slumped 2.8% to $15.49 billion, leaving the decline over the past year at 5.5%.

Adding to downside risks for Australia’s Q1 GDP report released next Wednesday, CAPEX on equipment, plant and machinery fell 0.5% to $13.8 billion, trimming the increase over the past year to 2.8%.

This figure feeds directly into GDP, and accounts for around 4% of the Australian economy. The disappointing result follows weakness in retail sales and construction work done in the first three months of the year.

“At face value the equipment investment figure implies a small drag of 0.02 percentage points from quarterly growth,” said Kaixin Owyong, economist at the National Australia Bank (NAB).

“The data adds a little downside risk to our Q1 GDP forecast of 0.5%.”

Adding to the weak CAPEX update, investment by individual industries was soft across the board.

CAPEX at “other select industries” — predominantly services firms — fell 1.2% to $19.3 billion during the quarter, leaving the increase over the past year at 4.3%, down from 7.4% in the year to Q4 2018.

Investment at manufacturing and mining firms also fell, slipping 7.4% and 1.3% respectively to $2.15 billion and $9.83 billion.

Over the year, investment across both industries slumped 8.5% and 12.9% respectively.

While actual investment in the March quarter was disappointing, there was better news looking ahead.

The second estimate for intended CAPEX in the 2019/20 financial year improved noticeably, rising to $99.1 billion, some 7.6% higher than the first estimate released three months ago. It was also 12.78% more than the second estimate offered for the 2018/19 financial year.

Markets were looking for an upgrade to $96 billion in today’s estimate.

Estimates tend to be revised higher over time as operating conditions for businesses become more certain. However, early estimates, including today’s, are often speculative and not indicative of actual investment that’s likely to be seen.


By category, expected CAPEX at “other select industries” — predominantly services firms — rose to $59 billion, up 7.8% from the first estimate and 9.6% more than the second estimate offered for the current financial year.

Intended investment at manufacturers rose 5.6% from three months earlier to $7.74 billion, up 6.5% on the second estimate offered for the 2018/19 financial year.

Combined, expected non-mining CAPEX next year rose to $66.7 billion.

That result will be welcomed by the Reserve Bank of Australia (RBA) given it is looking for stronger non-mining investment to help support growth in the coming years.

At mining firms, expected investment next year rose to $32.41 billion, up 7.7% on that offered three months ago. It was also 21% higher than the second estimate offered for 2018/19, reflecting the impact of firmer commodity prices over the past year.

“The mining sector is set to become a significant driver of business investment next year,” said Sarah Hunter, chief economist at BIS Oxford Economics, in a note following the CAPEX report.

“The combination of the end of the downturn in LNG investment and a rebound in other commodities is creating a mini investment boom in the sector.”

While early estimates are often highly speculative, reflecting there is increased uncertainty surrounding operating conditions in the future, Hunter says the broader lift in investment exceptions indicates that firms are looking to expand.

“Despite weaker momentum in the economy and some tightening in lending conditions, businesses see a need to expand capacity,” she said.

“Capacity utilisation rates remain around 80%, a level where firms typically need to expand capacity to meet additional demand.”

Although the lift in investment intentions points to confidence that demand will improve, and will please the RBA, Owyong at the NAB cautioned not to read too much into the result.

“The RBA is expecting stronger non-mining investment to be a support for growth and for mining investment to begin to pick-up,” he said.

“While these numbers offer some support to the bank’s outlook for mining investment, these early estimates are volatile and not strongly correlated to actual spending outcomes.”

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