UBS: Australian investment data is recessionary

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There may, as the song says, be trouble ahead.

Led by a collapse in mining sector spending, Australian new private capital expenditure (Capex) tanked in the June quarter, falling by a whopping 4.0%.

The decline left the annual decline in expenditure at a whopping 10.5%, the fastest drop since Australia was last in recession.

According to George Tharenou, Scott Haslem and Jim Xu, UBS Australia’s economics team, if today’s Capex report is correct, there’s a chance that Australia’s economy contracted during the June quarter.

Here’s their assessment on the weak Q2 Capex report released earlier today – the worst since Australia’s last recession 23 years ago.

“Private new capex (volumes) fell much more than expected (again) in Q2-15, slumping by 4.4% q/q (UBS & mkt: -2.5%) – to the lowest level since 2011 – after a downwardly revised -4.7% in Q1 (was -4.4%). Hence, the y/y slumped to -10.5%, the weakest since the last recession ended in 1992 (after -4.8%). Meanwhile, by industry, the fall was led by a collapse in mining (-11.3% q/q, -23.8% y/y) & manufacturing (-3.4%, -8.8% y/y), but “other” bounced after retracing (+4.4%, +8.1% y/y). By asset, there was a larger fall in buildings (-5.6%, -16.7% y/y), while equipment also fell solidly again (-1.2%, still +2.8% y/y)”.

While UBS still forecasts that the economy grew 0.2% over the June quarter, they suggest there’s a chance that the GDP figure could now print negative.

Beyond the June quarter, Tharenou, Haslem and Xu – despite some optimism being expressed by other market analysts – believe the outlook for business spending over the 2015/16 financial year remains “recessionary”.

“Meanwhile, for nominal capex intentions, the 3rd estimate of 2015/16 was a bit better than expected at $114.8bn (UBS & mkt: $111.0bn), an upgrade of 10% from the 2nd estimate of $104.5bn. However despite this, based on historic ‘realisation ratios’ (5-year average, GDP re-weighted), nominal implied growth in 15/16 was still actually worse at a ‘recessionary’ -19% y/y (was -18% previously). This is because intentions by industry showed “other” deteriorated sharply. Mining remains in depression (-38%, was -37%), while manufacturing was less weak (-11%, was -20%); but the double-dip in the large “other” category got even worse (-8%, was -6%)”.

The collapse in expenditure creates downside risks for economic growth, interest rates and the Australian dollar in the year ahead in UBS’ opinion.

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