One-off Quarterly Capex Weakness
(30 August 2018 - Australia) Australian private sector capital expenditure (Capex) fell sharply in the June quarter, falling short of expectations for a slight improvement.
Importantly however expected investment in the current financial year was revised sharply higher, suggesting the weakness is unlikely to last. According to the Australian Bureau of Statistics (ABS), business investment fell by 2.5 percent to A$29.1 billion over the quarter in seasonally adjusted chain volume terms, missing forecasts for an increase of 0.6 percent. From a year earlier, total Capex ticked higher by only 0.4 percent. Mining fell 10.5 percent, Manufacturing fell 0.9 percent and other selected industries rose 1.4 percent in seasonally adjusted terms. Capital expenditure in Q1 2018 was revised higher to an increase of 1.2 percent, up strongly from the originally recorded increase of 0.4 percent. Expenditure on building and structures made up the vast bulk of the decline, sliding 3.9 percent in volume terms to A$15.4 billion.
Investment on equipment, plant and machinery (P&E) also declined, falling 0.9 percent to A$13.7 billion. As a direct input into GDP (to be reported later this week by the RBA), this is a key outcome that will detract slightly from economic growth during the quarter. Capex on P&E in other sectors drove the decline, principally services, decreasing 2.9 percent to offset improvements of 5.6 percent and 3.9 percent for mining and manufacturing respectively. From Q2 2017, expenditure in this area has increased by a promising 6.9 percent. Despite outright capital expenditure disappointing, expectations for the future were positive with the third estimate for capex in the 2018/19 financial year lifting to A$102 billion, well above the A$100.1 billion figure expected. The increase represented a sizeable 16.1 percent increase from the second estimate notched in Q1, but was still down 1.1 percent on the third estimate for the 2017/18 financial year. Nominal expected capex was improved with the upward revision for the 2018/19 from the second estimate of A$87.9 billion exceeding however this infers that actual investment in 2018/19 will fall by seven percent to A$110 billion. Significant upward revisions to non-mining sectors were recorded, rising to A$70.1 billion total expected non-mining spend for the current financial year, while investment for other selected industries was revised higher to A$61.5 billion, 14.2 percent greater than the second estimate offered three months ago. However, from a year ago, the third estimate for 2018/19 was unchanged, casting some doubt as to whether the recent uptrend in investment at services firms will continue. Projected manufacturing capex was also revised sharply higher, lifting to A$8.7 billion.
Despite the sharp upward revisions to expected expenditure, Senior ANZ Economist Daniel Gradwell quoted that there are some concerns about the outlook for business investment in the period ahead - “The headline number for investment plans of $102 billion was in line with expectations, but the non-mining outlook implied a slight downgrade from last quarter. We estimate that private investment was broadly stable in Q2 and that the rise in overall GDP was half as good as the 1.0 leap in Q1. Perhaps more worrying are the mounting signs that the growth of private investment has already peaked. The outlook now suggests that CAPEX will rise only marginally by 0.4 percent in 2018-19, down from the 5 percent growth expected in the Q1 report, and the 8 percent expected in Q4. While it is still early days for these forecasts, it is still a disappointing result that the outlook has softened two quarters in a row.”