Australia: Private business capex spending increased by 0.8% for June quarter - Westpac

Andrew Hanlan, Research Analyst at Westpac, explains that for June quarter, Australia’s private business capex spending increased by 0.8%, exceeding their expectations (Westpac -0.8% and mkt median +0.5%).

Key Quotes

“By asset,

Equipment 2.7%, an upside surprise (Westpac 0.6%) 

Building & structures down 0.6%, also stronger than our forecast, of -1.8%. 

By industry: mining -2.8%; services +2.8%; and manufacturing +1.4%.”

“Capex spend has consolidated of late, with gains of 0.9% and 0.8% for the opening quarters of 2017, following a decline of only 1.1% in Q4 2016. The drag from the mining investment downturn is waning and investment by the non-mining sectors has moved a little higher.”

“The spike in infrastructure spending reported in the Construction Work Survey was not repeated in the capex survey. Here in the capex survey, they include progressive payments, along the lines of progressive change of ownership. In the CWD survey we suspect the figure reflected the one-off change of ownership of a large LNG platform, made in South Korea.”

“Implications for Q2 GDP growth forecast

We have rounded up our forecast for Q2 GDP growth to 0.7%qtr, 1.6%yr, edged up from 0.6% qtr.

This reflects the upside surprise from equipment spending, plus also an awareness of labour market strength in the quarter, with hours worked up 1.2%. In terms of private infrastructure spending, we will not include the +32.2% (+$4.0bn) from the CWD survey in our Q2 GDP calculations. Rather we now anticipate a broadly neutral figure for infrastructure, broadly in line with the tone of the capex survey. Keep in mind that the importation of a large structure does not impact Australian GDP, output – the rise in investment is offset by higher imports.” 

“2017/18 capex plans

Est 3 for 2017/18 is $101.8bn, which is –3.6% vs Est 3 a year earlier (-$3.8bn) 

This represents an upgrade on the plans reported 3 months ago. Recall that Est 2 on Est 2 was -6.4%. The main upgrade is around services, which is encouraging in terms of the outlook for 2017/18. While we will need to dig further into the detail, we suspect the improvement is centred on commercial building, as evident in building approvals. 

As for 2017/18, Est 3 on Est 3 by industry is: mining, -22%, -$9.2bn (unchanged from 3 months ago); services, +10% (upgraded from +6%); and manufacturing -2.6% (upgraded from -12.4%).

Shifting to calculations based on average realisation ratios (RRs), the preferred approach of the official family, Est 3 for 2017/18 implies –3% vs 2016/17, an upgrade from -9%.

By industry, results from average RR calculations are: mining, -24% (vs -26% 3 months ago); services, +9.5% vs +1.5% 3mths ago; and manufacturing, -5% vs -17% 3 months ago.”