Australia's business investment outlook is strengthening

Source: Chevron

Australia just had another solid reading on business investment.

Data for the September quarter showed capex rose by 1% to $29.368 billion in seasonally adjusted chain volume terms. The result was in line with forecasts.

Looking ahead, the fourth estimate for total CAPEX spend in the 2017/18 financial year rose to $108.9 billion, higher than the forecast revision of $105.4 billion.

In seasonally adjusted chain volume terms, new capital expenditure on buildings and structures rose by 1.2% to $16.462 billion. Q3 Capex for equipment, plant and machinery climbed by 0.7% to 12.906 billion.

The results are in line with an improved outlook for business investment by the RBA in the minutes of its November meeting, where the central bank took note of the recent pickup in non-mining investment.

The figures are also supported by improved manufacturing PMIs in recent months and business conditions at record high levels.

The September data also follows indications from ASX200 during August reporting season that more capital investment projects will be forthcoming.

The Australian dollar was little changed in the wake of the release.

“The breakdown shows that after falling by 2.0% q/q in the second quarter, mining capex was essentially unchanged,” Capital Economics’ Kate Hickie said.

“That was a good result given it has fallen in every quarter since the second quarter of 2014. Meanwhile, non-mining capex rose by 1.5% q/q, which was a little weaker than the 2.7% q/q rise in the second quarter but was still a fairly decent result.”

Adding to the positive outlook, the revised total of $108.9 billion for expected capex in 2017/18 was a 5.6% increase on the June quarter estimate of $103.1 billion.

This table from the ABS shows how the expected spend for 2017/18 continues to rise following today’s fourth estimate. The dark columns measure actual investment as each year progresses:

Source: ABS

“The third quarter private capital expenditure survey was better than expected, with the larger than normal upward revision to firms’ investment plans supporting our view that the outlook for business investment is getting brighter,” Hickie said.

The latest figures continued the trend seen in the June quarter results, with the outlook for 2017/18 capex being driven by sectors other than mining.

Among the five sectors the ABS tracks in the capex report, mining had the smallest increase in expected investment from June, reporting a 0.5% increase.

The outlook for spending on buildings and structures rose by 3.7% from the June estimate, while forecast spending on equipment, plants and machinery had a strong 8.7% increase.

Rounding out the five sectors, the outlook for 2017/18 manufacturing spending rose by 6.7% while forecast capex across other selected industries climbed by 8.3%.

“Based on the rise in capex from the 4th estimate, actual capex for 2017/18 could be around $112bn,” Hickie said.

“Admittedly, that would be 2% lower than total capex in 2016/17. But such a fall would be notably smaller than the 10.5% drop between 2015/16 and 2016/17. In other words, the outlook for business investment is starting to improve.”

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