Australia's horrible capex data puts rate cuts in play

Australia’s Q1 business capital expenditure (CAPEX) was released this morning and contained some horrible data.

The most crucial part of the report, 2015/16 expected capital expenditure, has come in at $104.033 billion, well short of expectations for a figure above $110 billion. Initially, the first estimate had been reported at $109.799 billion.

Only a year ago the second estimate for expenditure in the 2014/15 financial year was $138.060 billion. At $104.033 billion for the upcoming financial year, this represents a drop of $34 billion, or 24.7%.

The scale of the decline in expected expenditure is alarming.

From an industry perspective there is absolutely no sign that economic rebalancing is occurring.

The second estimate for mining sector spend came in at $52.192 billion. Not only was this lower than the first estimate of $53.82 billion but also 56.2% below the second estimate offered for for 2012/13, the peak of the mining boom.

Put another way, spending in the mining industry has more than halved in just two years, according to the estimates.

Expected spending in other industries – namely services, which along with manufacturing was what the RBA was looking to offset the decline in mining investment – are both lower than those offered a year ago.

The second estimate for other industries, while 6.6% above the revised 1st estimate, is nearly 10% below the second estimate offered for 2014/15 while that for manufacturing is 13.3% below that seen 12 months ago.

The chart below tells the story.

What’s clear here is there is no acceleration in expenditure. To the contrary, it’s actually contracting.

The much-mooted rebalancing, at least among businesses, isn’t simply not occurring.

This is a concern, not only for the RBA but for the overall outlook for Australian economic growth.

It is looking increasingly likely that households, through increased consumption, will need to accelerate sharply if already-low GDP growth forecasts are to be met.

How this can occur with unemployment sitting close to multi-decade highs and businesses spending contracting fast is anyone’s guess.

While the March quarter capex report does not capture the impact of the federal budget or recent modest improvements in domestic economic data, based on the scale of the slowdown in expected business spending, it is clear that if they weren’t previously, rate cuts in the second half of the year are now firmly on the table.

Reflecting the increased likelihood of rate cuts the Australian dollar has been crunched, falling below the US77c level, while three-year bond futures have jumped by 6bps to 98.02, indicating a yield of just 1.98% (and below the current cash rate). The ASX 200, up modestly earlier in the session, is now off by 0.4%.

Australian Dollar 5-minute chart

The details of actual March quarter CAPEX expenditure can be found below:

  • Total new capital expenditure: $35.895 billion, -4.4% Q/Q
  • Expenditure on buildings and structures: $23.1 billion, -6.5% Q/Q
  • Equipment, plant and machinery: $12.795 billion, -0.5% QQ (a direct Q1 GDP input)

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