Here’s the optimist’s view of things today:
Facts
– Data for Q4 2013 showed that capital expenditure fell by -5.2% q-o-q (market expected -1.3%), with plant & machinery investment falling by -8.6% q-o-q. By sector, mining investment fell -5.5% q-o-q, manufacturing investment was -7.0% lower q-o-q, while other industry investment fell by -4.4% q-o-q.
– Estimates for 2013/14 show that firm’s expect total investment to rise modestly, by between +0.5% and +0.7% using a (standard) 1-year and 5-year realization ratio, respectively. For the mining sector, investment is projected to fall by between -1.2% and -5.1% in the year, offset by a +3.0% to +3.1% rise in other sectors investment spending.
– The first available estimates for 2014/15 were published in today’s survey. They suggested that for the 2014/15 financial year, firm’s expect total investment to fall, by between -25% and -11% using a 1-year and 5-year realization ratio respectively. Mining sector investment is expected to decline by between -34% and -17% in the year, while non-mining expectations imply a range of a -4.1% fall in spending to a +0.4% rise.Implications
Today’s capital expenditure survey was weak, though perhaps not too surprisingly so. After all, it is well understood by now that the transition from mining to non-mining led growth is set to be challenging. The survey contained a number of elements.First, it showed estimates for Q4 2013, which suggested that investment fell in that quarter, as mining investment has now passed its peak.
Second, the survey contained the fifth estimate of investment intentions for 2013/14 financial year (July 2013-June 2014). This estimate showed that in the current financial year, investment is expected to have leveled out (+0.5% to +0.7%). Mining investment is expected to have fallen modestly, while non-mining investment is expected to have risen.
Third, it contained the first estimate of firm’s investment intentions for the 2014/15 financial year (July 2014-June 2015). This estimate was very weak. Using the standard procedures to correct for bias in early estimates of investment intentions (the one-year and five-year realization ratios) the survey suggests that investment is expected to fall by between -11% and -25% in 2014/15. Mining investment is set to fall, which should be no surprise at this point, with the estimates suggesting a -17% to -34% decline in the year. Other industries are expected to see broadly flat investment, with estimates ranging from -4.1% to +0.4%.
Taken alone, these investment intentions data suggest that capital expenditure will be a significant drag on the economy next financial year and that the transition from mining to non-mining led growth may not be smooth.
However, there are a number of caveats. One is that resource exports are expected to continue to ramp up very strongly over the next few years as new capacity comes on-line, which should support growth. Another is that much of the ramp up in invetsment was imported goods, so the fall will also be cushioned by a decline in imports. Still another is that the timely indicators of the economic conditions, including retail sales, housing approvals, business conditions and confidence have all improved through Q4, which may see investment intentions in a number of these sectors also improve in coming surveys.
Finally, history shows that the first estimate of the capital expenditure survey is often a weak predictor of ultimate investment, so there is a significant margin of error in these numbers.
Nonetheless, these numbers do present a significant downside risk to Australia’s growth outlook over the coming 18 months or so. While we expect growth to continue to rebalance, it will be a challenge to absorb the decline in mining investment that is expected.
Bottom line
Australia’s Q4 capex survey was weak, with investment falling in Q4 and the forward-looking part of the survey suggesting that firm’s expect a large decline in investment in 2014/15, led by falling mining investment.In terms of investment intentions, there are still very few signs that growth is rebalancing, although more timely indicators, such as retail sales, housing approvals and business conditions are more upbeat, suggesting investment intentions may yet improve before the 2014/15 year arrives.
We still see the RBA’s easing phase as done, although these capex data are a downside risk to the central case.
Rebalancing will prevail, apparently! Markets are now predicting zero movement on the cash rate for the next twelve months.
