Business investment rebounds in an otherwise cooling economy
Business appears to have shrugged off the impact of a cooling economy with a stronger-than-expected surge in investment towards the end of last year.
Key points:
- Overall business investment in the December quarter was strong, despite some weakness in plant and equipment spending
- The first take on investment plans for 2019/20 shows a solid 11pc increase to $92b on a year ago
- The mining bust appears to have bottomed with a 20pc spike in capex spending expected after years of tumbling investment
Private sector capital investment, or capex, for the three months to the end of the year rose by 2 per cent, a solid rebound from a disappointing fall in the third quarter.
The solid outcome is one of the brighter bits of economic news lately, after weak construction, retail and wages figures recently.
The slowing construction sector will be buoyed by a fresh pipeline of work, with investment in building and structures up 3.2 per cent in the December quarter.
Investment in the important equipment, plant and machinery sector — which feeds directly into next week’s GDP data — also edged up, albeit at a slower pace than previous surveys, while manufacturers cut their overall investment.
However, NAB’s Kaixin Owyong said the stronger-than-expected headline figure masks weakness in equipment investment.
“For fourth quarter GDP, the slight 0.7 per cent quarter-on-quarter increase in equipment, plant and machinery capex means virtually no contribution from this component to GDP,” Ms Owyong said.
Coming on top of yesterday’s weak construction figures, the equipment result does not bode well for a strong fourth quarter GDP result when it is released next week.
“These data taken together suggest that private investment growth was likely weaker-than-anticipated in Q4 and suggests downside risk to our 0.4 per cent quarter-on-quarter [2.6 per cent year-on-year] forecast for GDP,” Ms Owyong said.
However, there was more positive sentiment in future investment plans in the Australian Bureau of Statistics survey’s first estimate of spending in the 2019/20 financial year.
Businesses across the board said they planned investment of $92.1 billion next year, 11 per cent higher than the first estimate for 2018/19.
However, this response seems to be at odds with deteriorating business confidence and conditions reported in recent private monthly surveys.
Mining bust over
A deeper dive into investment expectations appears to show the mining construction downturn has bottomed out.
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Robert Rennie@Robert__RennieSo, it is official. The mining bust in Australia is over. Estimate 1 for 19/20 is up 21% on est 1 18/19. Same time last year it was -9%. However, services would be +6.8% vs +8% previous and manufacturing +5.2% vs +6.4% meaning capex growth intentions being driven solely by mining
Manufacturing and the services sector had more muted, but still solid, investment expectations.
“We are now essentially at the end of the downturn, and mining investment will no longer be the drag on GDP that is has been since 2012,” ANZ’s Felicity Emmett said.
Ms Emmett said overall the results were surprisingly positive.
“The RBA is likely to be relieved with the upgrade to investment plans,” she said.
“It is particularly important given the barrage of negative news over recent months, and suggests that despite the increase in downside risks for the economy, businesses remain relatively upbeat about the future.”
RBC’s Su-Lin Ong said, while the overall investment picture remains modest, the continuing firm trend in services sector capex was good news for the RBA.
“We note that this survey was taken over the last eight weeks amid a recovery in global risk appetite reflecting an easing in global financial conditions,” Ms Ong said.
“Against that, however, domestic data have largely surprised to the downside.”