Capital expenditure disappoints again, putting GDP under pressure
Australian business surprisingly pulled back on investment at the end of last year and its future intentions look far from strong according to data released by the Australian Bureau of Statistics.
- Capex was weaker than expected but spending intensions point to 2018/2019 seeing the first increase in business investment in six years
- Falling mining investment continues to be a drag although appears to have stabilised
- Construction capex disappointed, but there were more promising signs in manufacturing
Capital expenditure (capex) data for the final three months of last year showed a decline of 0.2 per cent on a seasonally adjusted basis.
The market had expected marginal growth over the quarter as the economic growth baton was handed from the winding down resources projects to other sectors.
The weakness was widespread, although there was some positive news in manufacturing investment.
The important forward looking first estimate of capex plans for 2018/2019 was also weaker than expected, up 3.5 per cent on the same time last year to $84 billion.
On the positive side of the ledger, it is the first time in 6 years that it looks like there will be an increase in capex over the previous year.
Total capex is now 4 per cent higher than a year earlier in seasonally adjusted terms.
Dollar sold off
The disappointing result immediately put the Australian dollar under pressure, falling to 77.3 US cents — with technical analysts quoted by Reuters suggesting a break down to 75 cents was on the cards.
Mining continued to be the biggest negative on the data, although its slide appears to have stabilised.
- Total capex (Q4 2017): -0.2pc
- Building and structures (Q4 2017): -2.1pc
- Equipment, plant & machinery (Q4 2017): +2.2 pc
- Mining (Q4 2017): -4.7pc
- Manufacturing (Q4 2017): +2.6pc
- Other — mainly services (Q4 2017): +2.2pc
However UBS economist George Tharenou noted in nominal terms the capex picture was still far from rosy.
"While the '1st [2017/18 estimate] vs 1st [2018/19 estimate]' was +4 per cent, the best since 12/13, this still implied nominal growth in 18/19 of -6 per cent year-on-year — with mining strangely still collapsing [-27 per cent], and manufacturing retracing sharply [-9 per cent], but [the 'other' category] up only modestly [+2 per cent]," Mr Tharenou wrote in a research note.
While the ABS survey is the broadest measure of business investment it excludes data from key sectors including health, education and agriculture.
2017 GDP downgraded: UBS
The figures prompted UBS to downgrade its forecast for 2017 GDP figures to be released next week.
"Overall, the capex data weakness may be overstated by mining, which should improve ahead given higher commodities, but the Q4 surprise followed falls in 'partials' for both housing and public construction which more than offset the bounce in retail," UBS economist George Tharenou said.
Mr Tharenou noted there were still more partial GDP figures covering trade, inventories, and overall consumption to be released, but he's seen enough to slash his forecast.
UBS dialled down its fourth quarter GDP figure for the quarter to 0.4 per cent growth from 0.7 per cent and the annualised figure for 2017 to 2.4 per cent from the consensus estimate of 2.6 per cent.
Some encouraging signs: RBC
RBC's Su-Lin Ong was more positive, saying despite a slightly disappointing outcome, the Reserve Bank may be heartened by the detail of the release.
"The further upward revision for spending plans for 2017-18, driven by non-mining capex, remains encouraging," Ms Ong said.
She said the plant and equipment component that best maps business investment in national accounts was positive and left her forecast for GDP data unchanged at 2.5 per cent growth for 2017 when published next week.
"As always, it is the expenditure plans that are more interesting amid signs in recent surveys that the drag from the completion of resource projects was nearing completion, with encouraging signs in non-mining capex," Ms Ong argued.
"This broad thematic remains comfortably intact and consistent with our long-held view of strengthening private business investment amid a similar global dynamic.