Weakest Australian Capex Since 2009 with More Pain to Come
(29 May 2020 – Australia) The Australian Bureau of Statistics (ABS) reports that total capital expenditure (capex) decreased by 1.6 percent in Q1 2020. The data also suggests this figure is set to only worsen through Q2 2020 and beyond.
Seasonally adjusted capex data released by the ABS showed total business investment of A$27.7 billion in the three months to March 2020, anchored by a slide in private spending on plant, equipment (P&E) and machinery. The negative Q1 2020 result follows a 2.6 percent fall in business investment in Q4 2019.
Although the figure was less than analysts’ expectations for a three percent decline noting the March quarter included the effects from the devastating bushfires but does not reflect the full impact of COVID-19 related shutdowns imposed late in Q1 2020, private capex will still likely have a negative impact on upcoming GDP data. Economists expect Australia's economy to contract by 0.5 percent in Q1 2020 and up to eight percent in Q2 2020, marking the first technical recession in over 30 years.
Businesses confirmed a scale back in spending with the ABS release showing spending plans are set to be put on hold ‘indefinitely’. Corporates expect to invest A$115. 4 billion in 2019/20, down 3.8 percent from their forecast in Q4 2019 and 5.6 percent lower year-on-year. Plans for 2020/21 are even more bleak, reflecting deteriorating economic indicators such as unemployment following the COVID-19 lockdowns as fiscal stimulus is viewed as ‘only going so far’. Businesses plan to invest only A$90.9 billion for the year, down 8.8 percent from three months ago and a fall of 7.9 per cent from 2019.
East & Partners latest Asset & Equipment Finance research confirms equipment finance represents a significantly larger share of borrowings for Micro businesses (36.9 percent) and SMEs (29.8 percent) relative to the middle market (17.8 percent) and Top 500 (7.6 percent). As a result a decline in revenue, confidence and activity converts directly into lower spend on new or replacement business assets.
Institutional equipment finance demand is relatively low due to the abundance of alternative borrowing sources, debt capital markets and equity funding available to larger sized enterprises. Equipment Finance customers market wide are growing increasingly dissatisfied with overly complicated Credit Requirements, Pricing and Relationship Management capability, despite rating these three factors among the top five most important.
“This was a smaller fall than expected, with rises in mining and manufacturing capex offsetting a decline in other industries. It was still the weakest quarterly level of capex since 2009, even before the more severe impacts of the pandemic materialise” stated ANZ Senior Economist, Catherine Birch.
“Based on Thursday's numbers, private business investment would likely decline by six percent to eight percent over the 2020-21 financial year, compared with the expectation of a four percent to six percent increase three months ago. For now, it's difficult to see a significant turnaround in business investment until there is some decent rebound in consumer demand. Business capex will remain a drag on GDP growth in the near term, with mining investment growth stronger compared to non-mining” said AMP Capital economist, Diana Mousina
"While market focus has largely moved on from Q1 to Q2 and beyond, these data confirm pretty subdued investment even prior to COVID-19" RBC Capital Markets strategist Robert Thompson said.