Australia: Capex joins the growth party – TDS

Australia’s Q2 capex rose by +0.8%/qtr, where the portion that feeds into GDP jumped by +2.7%/qtr while the third estimate for investment in 2017/18 was upgraded to $A101.8b, notes the analysis team at TDS.

Key Quotes

“Jun qtr real private capital expenditure (capex) rose by +0.8%/ qtr, where the component that feeds into GDP—plant & equipment investment—rose by +2.7%/qtr. Manufacturing rose by +1.4%/qtr while services increased by +2.8%.”

“The planned (raw) spend for 2017/18 was upgraded to $A101.8b. After adjustment, spending is expected to marginally shrink (-4%) a welcome upgrade from the prior –12%, due to services capex being upgraded +10%. This is a long overdue upgrade commensurate with the impressive lift in business confidence and conditions this year.”

“Ahead of Q2 inventories, net exports and public spending updates next week, our Jun qtr GDP tracking is +0.8%/qtr, lifting annual GDP growth to 1.8%/yr. However, given that Q1 capex was upgraded, a return to 2% annual GDP growth cannot be ruled out, which would then slightly overshoot the RBA’s August projection of 1¾%/yr.”

“2016/17 actual spend

Mining investment shrank by another 28% to $A38.7b although the main focus ’services’ (at $A67b) remained at similar levels to the previous year. The ‘rounding error’ manufacturing investment rose by 4% to $A8.9b. Services accounted for 59% of investment in 2016/17, a ratio that mining used to have at the peak in 2012/13.”

“2017/18 intentions—third update

While still a guesstimate, there is all good news here for the third estimate (next estimate will contain one “actual” spend). Applying the new 5yr rolling average realisation ratio, the adjusted expected spend is $A110b, with services spending accounting for 2/3 of that.

Mining continues to shrink, by another –26% to $A29b while ’services’ (at $A73b, a fresh record high) is 10% higher than this year’s spend. Manufacturing is projected to ease to $A8.5b, an upgrade from the prior report, but doesn’t materially impact the bottom line for investment trends.”