- Australia’s latest business CAPEX report offered a mixed picture on both current and expected investment from Australia’s private sector.
- Total CAPEX fell in the December quarter with the outlook for investment in 2018/19 falling short of expectations.
- Most economists believe the report is encouraging on the outlook for investment, and overall economic growth.
Australia’s December quarter business capital expenditure (CAPEX) report was today, offering a mixed picture on both current and expected investment from Australia’s private sector.
On one hand, CAPEX declined by 0.2% over the quarter, falling short of market expectations that were looking for an increase of 1%.
However, spending on equipment, plant and machinery grew by 2.2%, and will contribute to economic growth in Australia’s Q4 GDP report released next Wednesday.
And while expected expenditure in the 2018/19 financial year was higher than what it was at the same point a year ago, at $84 billion, it was marginally below the $86.5 billion level that had been expected by economists.
With the RBA expecting business investment to improve in the coming years on the back of improved confidence and operating conditions, the result was deemed to be a little disappointing by markets, raising questions as to whether the improvement will be as strong as the RBA and others currently anticipate.
The small miss in next year’s investment survey certainly caught the attention of traders, contributing to the Australian dollar falling to the lowest point since late December.
While markets have already acted, it’s time to see what economists have made of it all.
Was the report really disappointing, or does the pickup in expected investment herald brighter times ahead.
Let’s find out.
Kristina Clifton, Commonwealth Bank
With the mining boom and bust now largely over the main focus is on non mining investment. The outlook for non mining capex looks good, with actual capex rising and spending intentions solid for both this financial year and next.
The background conditions for stronger spending are in place. Global growth has picked up, business conditions and confidence have been elevated for some time now and employment growth is strong. The lift in public infrastructure spending also has positive spillovers for private sector firms, particularly given that the private sector is undertaking a good chunk of this work on behalf of the government. Weak wages growth is also a windfall for businesses. For mining firms, commodity prices remain firm and have been for quite a while and we are starting to see some green shoots emerging in mineral resource projects.
Today’s data has no immediate implications for monetary policy, but it does add to the favourable economic picture. However with wages growth and inflation still soft and rate rise is off the cards until late 2018 at the earliest.
Su-Lin Ong, RBC Capital Markets
From a policy perspective, today’s survey was mostly pleasing.
Firstly, the drag on activity from the completion of large resource related projects looks almost complete, with only further modest downside in the coming quarters. Secondly, the firmer non-mining CAPEX story remains intact and encouraging.
While we are cautious on a number of aspects of the Australian economy, notably the consumer, we have long been upbeat on the outlook for non-mining CAPEX, with our annual forecasts above those implied by this survey for some time and in line with the stronger global CAPEX cycle. Thirdly, stronger CAPEX beyond replacement spending will, ultimately, contribute to stronger growth and the nation’s productive capacity.
There are limited implications for the RBA from today’s release. We doubt that they will place too much weight on the first estimate of spending plans for FY2018–19 and will continue to expect supportive business conditions to lift these plans going forward.
Felicity Emmett, ANZ Bank
Overall a mixed CAPEX report for Q4. Investment unexpectedly declined in Q4, as nonresidential investment fell. Plant and equipment spending rose solidly however.
The report contained a first estimate for firms’ 2018-19 CAPEX plans, which were a little lower than market expectations. Importantly, though, implied growth for non-mining investment over the forecast period remains solid. Adjusting for the tendency for firms to understate investment at this point in the cycle, the numbers point to a rise in non-mining investment of 9% in 2017-18 followed by a rise of 8% in 2018-19.
Bear in mind, though, that these initial estimates are particularly rubbery and are often subject to large revisions over the following 18 months. They do, however, act as a constructive guide for the medium-term sentiment around investment spending and on that front continue to suggest quite a positive outlook.
Stephen Walters, AICD
The results of the December quarter survey were encouraging, with firms upgrading their investment plans for the current fiscal year, even though the miners continue to scale back. Moreover, for the first time in six years, firms’ initial spending estimates for 2018-19 are higher than those for the preceding year. This probably is a result of the general improvement in underlying business conditions, particularly profitability.
The first estimate of spending for 2018-19 came in only slightly short of economists’ expectations, which had implied a small rise in spending next year. The initial estimate of spending can be unreliable, and usually is revised higher in subsequent estimates, so perhaps we should not be too worried that there was not a more material upswing. But the business environment continues to improve with profits higher, the maintenance of low interest rates, and record hiring last year.
The likelihood of more delays in the planned lowering of the corporate tax rate in Australia does not seem to have played a significant role here, nor growing fears that interest rates probably have to rise. Indeed, firms can run ageing plant and equipment only for so long, so a wave of new investment on the replacement and upgrading of equipment should have been on its way. Moreover, public spending on infrastructure is enjoying a sustained upswing, particularly in the larger capital cities.
Paul Dales, Capital Economics
The private capital expenditure survey for the fourth quarter was a bit weaker than widely expected, but the key point is that investment is no longer the Achilles heel of the economy as firms are starting to flex their spending muscles.
The CAPEX survey doesn’t tell us everything as it excludes spending in the agriculture, health and education sectors. Even so, it is becoming clearer and clearer that the previous rises in profits and the more recent rises in business confidence are prompting non-mining businesses to boost spending.
As other parts of the economy aren’t doing quite as well, it looks as though the 0.6% rise in GDP in the third quarter was followed by something similar in the fourth quarter.