UBS just dropped the R-word in a note on Australia’s growth outlook

Today’s capex data for Australia had markets drawing a sharp intake of breath. It was nasty.

While there have been some very encouraging signs on some domestic indicators recently, such as in consumer confidence and building approvals, as things stand from the capex data there is no sign that other industries are picking up their investment plans fast enough to fill the hole left by the end of the mining boom.

Business, despite record-low interest rates, is not ready to spend.

UBS economists just put out a note under the headline: “Capex outlook worsens from bleak to recessionary”, saying there is now downside risk to their already grim economic growth forecasts.

From the note by George Tharenou and Scott Haslem. Brace yourself:

… the capex outlook deteriorated from already ‘bleak’ 3 months ago, to now ‘recessionary’. The ‘capex cliff’ arrived early with implied nominal growth in 14/15 slashed to -8% y/y, & 15/16 cut to -14% y/y, both much weaker than our forecast -4%. Hence looking forward, to support growth AUD depreciation is ‘necessary’ (UBS: 0.70USD by end-15). But, this data is so bad it would worry the RBA, & now raises the risk they cut rates again ahead (but probably not until after Q2 CPI). Indeed, a recessionary capex outlook is a downside risk to our already well below consensus GDP forecast of 2.2% y/y in in 2015 and 2.8% in 2016.

The 70c level for the Australian dollar estimated is still a long way off, with the Aussie trading a bit below 77c today.

Here’s a chart from the note showing the year-on-year estimated contraction in spending is the worst on record and at levels greater than previous recessions.


It’s clear how they reached their conclusion.

SEE ALSO: Australia’s horrible capex data puts rate cuts in play