Australian Q3 capex survey: Currently, business investment is on the rise – Westpac

Andrew Hanlan, Research Analyst at Westpac, notes that for September quarter, Australia’s private business capex spending advanced by 1.0%, meeting the median market expectation but exceeding their forecast of -0.3%.

Key Quotes

“By asset,

• Equipment 0.7%, in line with our forecast of 0.8%. 
• Building & structures increased by 1.2%, stronger than our forecast, of -1.2%.

“By industry: mining 0.0%; services +2.1%; and manufacturing -2.7%.”

“The surprise here is that mining investment was flat in the quarter – which follows a string of negatives. The drag from the mining investment wind-down is greatly diminished, contributing to the improvement in conditions during 2017 in the mining states. We still some downside to mining infrastructure work in 2018 as the remaining gas projects under construction are completed – but the drag is greatly reduced.”

“Equipment spending advanced modestly, in line with our expectations, coming on the back of a 2.1% rebound in Q2.”

“Implications for Q3 GDP growth forecast 

• Our forecast for Q3 GDP remains 0.8%qtr, 3.1%yr.
• The upside on building & structures suggests that total private infrastructure activity consolidated in the quarter (rather than declining modestly as we anticipated), while we know that non-residential building work advanced by 1.0%. That upside was not enough to see us shift our quarterly forecast.
• Annual real GDP growth jumps from 1.8% in June to 3.1% in September, with a -0.4% dropping out of the calculations. Note that hours worked grew by 0.6%qtr, 2.8%yr in Q3, the strongest annual pace since the end of 2015 and before that since the start of 2011.”

“2017/18 capex plans 

• Est 4 for 2017/18 is $108.9bn, which is +1.6% vs Est 4 a year earlier
• This represents an upgrade from the plans reported three months ago, with Est 3 on Est 3 originally reported at -3.6%. Recall that in turn the last survey was also upgrade, with Est 2 on Est 2 originally reported as -6.4%.
• Current trends in business investment have clearly improved, reflecting the diminished drag from mining and a lift in non-mining investment spending, largely on the construction side.
• Upgrades in this update were broadly based, across industries and assets.
• By industry, Est 4 on Est 4 is: mining -17% (upgraded from -22%); services +13% (upgraded from +10%, which was upgraded from +6% prior to that); and manufacturing +7.5 (upgraded -3%)
• Detail for services was positive, the +13% Est 4 on Est 4 is comprised of +23% for building & structures and +4% for equipment (upgraded from -2%).
• The construction strength is consistent with the uptrend in non-residential building approvals and the lift in infrastructure work (telecommunications and power generation). The equipment upgrade is welcome but given the lack of strength in consumer spending the sustainability of any increase is uncertain.
• For the mining states, recent higher commodity prices have improved cash flows and boosted confidence. In the non-mining states, there is the need to expand the capital stock to meet the needs of a growing population. However, the weak link remains the consumer, constrained by weak wages growth and high household debt levels.”