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Australian Q3 capex data surprises to the upside

Australian Q3 capex data surprises to the upside

(29 November 2018 - Australia) Latest ABS capital expenditure (capex) data shows Australian corporates have lifted spending plans for the coming financial year, beating expectations for flat or falling business investment.

Plant and equipment spending continues to trend higher, up 2.2 percent in Q3 2018 to be 7.7 percent above the corresponding level in Q3 2017. The 11.3 percent rise in expected spending for the 2018/19 financial year is the strongest fourth estimate in almost twenty years despite a decline in Q3 2018 investment of 0.5 percent to A$29.5 billion. The broad overview for capex spending shows mining investment will continue its slide lower while much needed non-mining investment continues to recover slowly. Investment by the mining sector last quarter fell by 2.7 percent as a 7.4 percent lift in spending on plant, equipment, and machinery was more offset by a 5.7 percent fall in investment on buildings and structures. Record low interest rates, federal and state government infrastructure development and steady retail and business sentiment suggest that non-mining should be tracking much higher however non-mining spending has only ticked higher by four percent year-on-year.

Expected 2018-19 spending for Australia’s non-mining sectors rose to A$80.7 billion, up more than six percent on a year ago. Offsetting the improvement in non-mining industries, expected investment among mining companies continued to fall, reaching A$33.4 billion for a decline of 1.1 percent from the fourth estimate offered in the prior financial year. Equipment, plant and machinery investment expanded by 2.2 percent in Q3 2018, underpinning economic growth. Investment in other selected industries such as utilities, telecommunications and services was unchanged while manufacturing investment improved steadily by 2.7 percent. It is important to note the survey captures two thirds of total Australian business investment and important sectors such as health, education and agriculture are omitted while software and cloud investment also remains underrepresented. A standout was the solid rise in manufacturing investment and investment by power utilities with investment up no less than 75 percent in the year to June driven by renewables strength.

The result should be welcomed by RBA policymakers who are relying on stronger non-mining investment to maintain GDP growth above 3 percent. BIS Oxford Economics Chief Australia Economist Sarah Hunter stated there was positive news within the report especially on the outlook for non-mining investment - “The survey data confirms the information from the business confidence indicators. Firms remain optimistic about the outlook, are increasingly hitting capacity constraints, and are planning to invest to expand capacity. We continue to expect non-mining business investment to be a driver of growth over the next 1-2 years, and are forecasting a 6.6% increase for the current financial year.”

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