CAPEX: Investment looks like it's turning the corner

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Australia latest report card on business investment has just been released, and it’s delivered some pleasing news.

CAPEX not only increased more than expected in the June quarter, but there was also a big upgrade on the expected level of investment in the current financial year.

All good news, and a result that fits with recent strength in business surveys released by the National Australia Bank and Ai Group.

According to the ABS, private-sector capital expenditure (CAPEX) rose by 0.8% to $28.275 billion in seasonally adjusted chain volume terms, topping forecasts for a smaller increase of 0.2%.

Within that figure, spending on equipment, plant and machinery jumped by 2.7% to $12.489 billion, an important outcome as this figure will flow directly into Australia’s Q2 GDP report next Wednesday.

That helped to offset a 0.6% drop in investment on buildings and structures which fell to $15.786 billion.

In terms of spend by sector, the ABS said that CAPEX for “other” industries — predominantly services — rose by 2.8% with investment on equipment, plant and machinery and buildings and structures rising 2.7% and 2.8% respectively.

Manufacturing CAPEX increased by 1.4% over the same period.

Those results helped to offset a 2.8% decline in mining sector CAPEX during the quarter, an result that continues to reflect the unwind of Australia’s mining infrastructure boom.

Adding to the solid report on where money was spent, expectations for investment in the current financial year easily breezed past economist forecasts.

According to the ABS, the third estimate of expected spend jumped to $101.8 billion, well above the $95.9 billion level that had been expected by economists.

That represented a massive 17.6% increase on the second estimate for the 2017/18 financial year, but was still down 3.6% on the same estimate offered for the 2016/17 financial year.

This table from the ABS shows the solid lift in expected spend in the third estimate for 2017/18. As a side note, the dark columns measure actual investment as each year progresses.

Source: ABS

Adding to optimism over the headline increase in expected CAPEX investment, it was driven by solid lifts for both mining and non-mining investment.

That’s an encouraging sign that Australia’s economic rebalancing is continuing to strengthen.

The ABS said that expected mining CAPEX rose to $32.06 billion, up 12.8% on the previous estimate.

Source: ABS

For non-mining sectors, expected spend at other industries rose to $61.44 billion, some 19.4% higher than the second estimate. It was also up 10% on the third estimate offered for the 2016/17 financial year.

The manufacturing sector also chimed in with expected investment lifting 24.2% to $8.28 billion.

Here’s the evolution in estimates for spending in other industries.

Source: ABS

And for the manufacturing sector.

Source: ABS

Combined, that left total expected spend for non-mining sectors during the 2017/18 financial year at $69.72 billion.

“A raw non-mining estimate above $68 billion would be considered a strong result,” said Daniel Gradwell, an economist at ANZ, before the release of today’s report. “[This] would provide further evidence that the strong business environment is translating into an improved investment outlook.”

Based on the evidence seen in today’s report, it certainly looks like it is.

With business confidence and conditions continuing to strengthen, it looks like that’s encouraging firms to lift investment, a promising sign on the outlook for the broader Australian economy.

“The survey suggests that the recent rises in business confidence may soon translate into a bit more investment activity,” says Paul Dales, chief Australia and New Zealand economist at Capital Economics. “This is undoubtedly good for the economy, although the real risks now lie in the household sector.”

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