Australian business investment continued to slide in the final three months of 2016.
And it’s not expected to get much better in the next financial year.
According to the ABS, private new capital expenditure (CAPEX) fell by 2.1% to $27.4 billion in the December quarter in seasonally adjusted terms, well below the 0.5% contraction that had been expected by economists.
That decline followed a drop of 3.3% in the September quarter that was initially reported as a contraction of 4%.
By component, building CAPEX fell by 4.1% to $15.3 billion, a larger drop than the 3.6% drop reported in the previous quarter.
Helping to soften the blow from the weak headline result, equipment, plant and machinery CAPEX rose by 0.4% to $12.3 billion.
This figure will feed directly into next Wednesday’s Australian GDP report, and will marginally add to growth.
However, equipment, plant and machinery spending in the September quarter — previously reported as a decline of 1.9% — was revised to show a larger drop of 3.0%.
CAPEX at other industries — predominantly services — rose by 1.8% to $16.3 billion, outpaced by a 3.2% increase in CAPEX among manufacturing firms to $2.08 billion.
However, that was completely overridden by another slump in mining CAPEX which plummeted by 9.3% to $9.2 billion in the quarter.
Mining CAPEX now sits at the lowest level since December 2009, reflecting the ongoing effect of the unwinding mining infrastructure boom.
Adding to the disappointing report, the first estimate for expected expenditure in the 2017/18 financial year was also weak, coming in at $81 billion.
That was 3.9% below the first estimate offered in the 2016/17 financial year and fell short of market expectations for a spend of $84.4 billion.
However, while total expected spend was weaker than what the market had expected, there was some pleasing news on the outlook for Australia’s economic transition: expected CAPEX for “other” industries in 2017/18 — largely services — was far stronger than the first estimate offered for 2016/17.
The ABS said it was expected to increase to $46.8 billion, up 8.3% on the same estimate for 2016-17.
Explaining the weakness in the headline figure, expected expenditure from mining and manufacturing firms both declined, particularly for the former.
Estimate one for mining CAPEX was $27.3 billion, a massive 20% lower than the first estimate for 2016/17. Manufacturing CAPEX, the smallest of all sectors, is expected to come in at $6.5 billion, down 1.2% on the previous year.
So a mixed bag, if slightly disappointing. The expected spend for the mining sector is particularly telling, and suggests that recent strength in commodity prices has not led to an increase in expected investment, yet.
However, there was better news on expected expenditure in the current financial year with the fifth estimate increasing to $112.2 billion, up 4.6% on the fourth estimate.
That was still down 9% on the fifth estimate offered in 2015/16.
Compared to the fourth estimate, the ABS said expected spend at mining, manufacturing and other firms increased by 0.6%, 0.2% and 8.0% respectively.
The latter, again, is a promising sign for Australia’s economic transition in the first half of this year.
While there were some promising signs from the report, particularly on investment by services firms, that improvement is still not enough to offset the effects of declining mining investment.
However, there must be particular caution in interpreting the report.
Not only are first estimates for expected spend each financial year highly speculative, and prone to upward revisions as business conditions become clear to firms.
It’s also worthwhile noting that the survey only captures around 60% of total business investment in Australia, excluding industries such as education, health and agricultural, as well as from the public sector.
So while slightly disappointing, whether the expected drop in investment occurs next year will largely be determined how economic conditions — both at home and abroad — evolve in the months ahead.