Australia latest report card on business investment has just been released, and it’s delivered mixed results.
On one hand total capital expenditure increased modestly during the March quarter, but the key components of the report — the outlook for investment and spending on equipment, plant and machinery — undershot expectations, adding to downside risks to GDP growth both now and in the future.
Not the best of news.
According to the ABS, total capital expenditure increased by 0.3% to $27.969 billion during the quarter, recovering from a 1% drop in the final quarter of last year that was originally reported as a larger decline of 2.1%.
Although an increase, it was fractionally below the 0.5% forecast that had been expected by economists.
And the internals of the report delivered some unwelcome news on the outlook for Australia’s March quarter GDP report with spending on equipment, plant and machinery falling by 0.1% to $12.133 billion.
This component feeds directly into GDP, and coupled with soft retail sales volumes and a decline in residential construction during the quarter, will create additional downside risks for economic growth during the quarter.
The other category in report — spending on buildings and structures — rose by 0.7% to $15.836 billion.
CAPEX across both categories fell from a year earlier in seasonally adjusted terms, declining 0.1% and 15.2% respectively. That left total investment on a year earlier down 9.3%.
By sector, investment in “other” industries — predominantly services — fell by 0.5%. That was offset by a lift in mining and manufacturing CAPEX of 0.4% and 6.6% respectively.
The strength in the latter, the smallest of all categories, may be due to recent strong levels of activity that have been reported across the sector in recent months.
The Ai Group’s manufacturing PMI for May — released earlier today — reported that activity levels have now expanded for eight consecutive months.
Still, the weakness in service sector spending is a concern, not only because it is now the largest source of investment but also because it is expected to help drive investment in the future.
And on that front the report also delivered some disappointing news with the second estimate for 2017/18 CAPEX slightly undershooting market expectations.
It rose to $85.436 billion, 5.2% above the figure released in the prior quarter.
While seemingly a good outcome, and let’s be honest it’s not all that bad, it was still 6.4% below the second estimate offered in the prior financial year.
It also came in slightly below market expectations for a lift to $88 billion.
A small but disappointing miss, even if the expected spend tends to lift over time as operating conditions become clearer to firms.
By sector, the ABS said that other industries intend to outlay $50.541 billion in the next financial year, some 6.2% higher than the previous estimate and 6.5% higher than the second estimate offered for 2016/17.
Of the other sectors, mining firms plan to invest $28.527 billion in 2017/18, down 21.7% on estimate offered in the prior financial year but 4.7% above the figure offered in the first estimate.
The lift in expected CAPEX could be due to recent strength in commodity prices, even forgiving that these estimates would have been offered when prices were significantly higher than where they currently sit.
Manufacturing firms, despite being the best performing sector during the March quarter, said that they plan to spend $6.368 billion in 2017/18, 1.6% below the first estimate and down 12.4% from the levels of a year earlier.
The closure, or impending closure, of Australia’s car manufacturing sector likely explains some of the weakness in this figure.
While as a whole the report was came in on the weak side of the ledger, it’s not a horrible outcome by any stretch.
For a start, the CAPEX figures contained here represent around only 60% of total business investment, excluding spending in large industries such as health, education and agriculture.
And while expected spending for the upcoming financial year undershot forecasts, it still increased, led by by Australia’s all-important services sector.
That will go someway to alleviating concerns about the near-term growth outlook given weakness in all three of the partial GDP inputs already received for the March quarter.
As for whether the expected pickup in spending will occur in the coming quarters, much will be determined by the strength of the Australian economy.