Australia: Q3 CAPEX continues the recent run of more positive news - Westpac

The ABS private capex survey for September continued the recent run of more positive news on business investment and in summary, business investment has lifted and will advance in 2017, following four years of decline, explains Andrew Hanlan, Research Analyst at Westpac.

Key Quotes

“The drag from the mining investment wind-down is greatly diminished, although not fully complete, and the non-mining sectors are looking to expand the capital stock to meet the needs of a growing population. Recent higher commodity prices have improved cash flows for mining companies but don't expect to see another round of major mining projects.”

“However, of concern, the investment recovery to date is uneven. Construction activity is increasing but the trend in equipment spending is unconvincing. This reflects the impact of lacklustre consumer spending. As we have highlighted, a key area of weakness currently is the consumer, constrained by weak wages and high debt.”

“Turning to the detail of the capex survey. Capex spend increased by 1.0% in Q3, meeting market expectations but exceeding our forecast of -0.3%.”

“Equipment spending increased by a modest 0.7% in Q3, in line with our forecast of 0.8%, and comes on the heels of a 2.1% rebound in Q2.”

“Building & structures rose by 1.2%, whereas we expected a decline of that magnitude. Also of note mining capex was steady in the September quarter, following a string of negatives.”

“Estimate 4 of capex plans for the 2017/18 financial year is $109.8bn. That is 1.6% above Est 4 of a year ago. The last time that the Est 4 on Est 4 comparison was positive was in November 2012. Investment plans have been upgraded for the second survey in a row. The Estimate on Estimate comparison has turned around from -6.4% for Est 2 to -3.6% for Est 3 and now to +1.6% for Est 4.”

“Upgrades to capex plans are across the board. Est 4 on Est 4 by industry is: mining -17% (upgraded from -22%); services +13% (upgraded from +10% and from +6% before that); and manufacturing +7.5% (up from -3%). By asset: building & structure +0.5% (from -5%) and equipment +3.5% (from -2%).”

“Calculations based on average realisation ratios (RRs) describe a similar picture. Est 4 implies a flat 2017/18, upgraded from -3% three months ago. By industry, results from average RR calculations are: mining -22%; services +12%; and manufacturing +2%.”

“Note, the capex survey has its limitations. The survey provides only partial coverage of total business investment, thereby overweighting the mining sector. Preliminary estimates (particularly Est 1 and Est 2) of capex plans are, by their nature, an inaccurate guide to the ultimate outcome - the extent of the error varies by asset, by industry and from year to year.”