Capex free-fall to jolt RBA


And following the happy take from Bloxo, here’s the sober take from Stephen Walters at JPMorgan:

Today’s December quarter private investment report was bleak; the spending outcomes were weak virtually across the board, with only firms’ expectations of spending in the current fiscal year holding up. Spending cratered last quarter (down 5.2%q/q in real terms) and, worse, firms plan to slash investment spending in the year ended June 2015. So much for the hoped-for rotation in the sources of growth in the economy away from mining investment!

The data reveals that firms in mining continue to scale back their spending intentions, albeit more quickly than we had anticipated, while those outside the mining sector are treading water – at best. The planned large falls in spending in mining are swamping the slightly higher intentions elsewhere, with manufacturing still a dead-weight. The net result is that private investment will be a material drag on growth in the economy in the next fiscal year, at least and, the way things seem headed, probably much longer.

Indeed, the expected weakness in private investment in mining, which peaked above 7% of GDP last year, further highlights the need for other parts of the economy to step up and fill the widening “growth gap”. Yes, investment plans outside the resources sector are starting to firm (if you look very closely), export volumes are rising (thanks mainly to the capacity expansion in mining), and there is lift in the interest-sensitive housing market. Phew! These, however, will be insufficient to replace the 4-6% point share of GDP likely to be lost from mining investment, depending on the speed of completion of existing work and the emergence of new projects. This means sub-trend growth and higher unemployment.

Falling public investment also will be a material drag on GDP growth from here. The Treasurer has been softening up voters for a large dose of “tough love” in the May Budget, which implies the fiscal drag over four years will be materially larger than the 2% points we currently forecast (based on the latest – but now outdated – estimates provided by Treasury in December). Again, this makes it all the more critical that other sectors of the economy step up – clearly, on today’s evidence, this remains a work in progress.

On today’s survey details, for the current fiscal year ended June 2014 which, admittedly, we now are half way through with this data, firms plan to spend a decent enough tally of $167 billion, a touch more than in the previous survey and our estimate of $166 billion. After adjustment for the usual estimation errors (based on firms’ fifth estimate of their spending plans and using a five year average realization ratio), this implies a fall of only 1% from spending in the year ended June 2013. Ahem … that’s the good news.

Indeed, much more importantly, today’s survey included the first estimate of firms’ spending in the fiscal year ended June 2015, and this outcome was dismal. The estimate landed disappointingly low at $124.9 billion, well below the JPMorgan expectation of $134 billion (there is no consensus forecast). After adjustment for the usual projection errors, the expected drop in spending next year is double what we anticipated at 13%oya, albeit from still elevated levels. If realized, this will be largest annual fall in the history of this survey!

By sector, unsurprisingly, the weakness in the forward looking estimates is concentrated in mining, with firms there expecting to spend 25% less than in the current fiscal year. Firms in manufacturing, or what’s left of them, expect to slash spending again (no surprises there given recent announcements by all three major car makers that they will cease production in Australia by 2017), while firms in “other” sectors of the economy plan to spend a little more (just).

Last quarter’s investment spending outcome also was cheerless; investment fell more than we had anticipated, further cooling our expectations for the GDP result next week. Spending in real terms plunged 5.2%q/q, the largest fall since the dark days of the global financial crisis in 2009. Outlays on plant and equipment cratered nearly 9% and spending on buildings and structures fell “only” 3.5%. This leaves investment over the year down nearly 6%oya, a larger fall prevented only by decent rises in earlier quarters.


For the RBA, today’s data should start to ring some bells. Board members removed the implied easing bias last month partly because of growing confidence that the rotation away from mining investment as the (only) source of growth in the economy was taking place, helped by previous policy support. Today’s data raises big question marks about the speed of this rotation, and also over whether removing the easing bias last month was prudent, after all.

Much closer to reality. Today’s survey has more rate cuts written all over it.

45 Responses to “ “Capex free-fall to jolt RBA”

  1. AF says:

    Well what are they going to do?

    Drop rates and juice the housing market even more, because that has worked so well so far ……..

    Time to raise rates on home loans and offer lower business lending rates, or make them the same, so that there is incentive to put money into a productive asset class!

    • They’ve stuffed it, yes.

      • Phroneo says:

        No, I do not believe they have stuffed it. Most if not all of the RBA board own investment properties. And after arguing a while back against rising property prices, they have more recently gone all in with house price pumping policy by avoiding macro prudential. It’s not abnormal to play down the importance of medium-long-term consequences when one’s financial interest can be boosted.

        So no, they haven’t stuffed it, but they have stuffed us.

      • coolnik says:

        Yes, HnH why do you keep saying that what is happening is not what RBA intended to do? For a year or so, the evidence says nothing other than this is exactly what the RBA wants.

    • Gramus says:

      Investment will need to come from housing yes… Australia genuinely needs more houses so productive economic growth can come for additional housing investment which leads to MORE SUPPLY.

      But lower rates won’t do it. It is fundamental reform of planning, land release, and infrastructure which will do it.

      That will take a change in thinking of our political classes. Especially Labor and the Greens who are currently blocking major changes to NSW planning laws which will free up supply in Sydney.

      • speculator says:

        why we need more houses?
        we already have almost half a million empty homes

        what productive comes out of more housing supply?

        excess housing is waste in its purest

      • And then what? …….

        Spain painted themselves into a corner under this approach. All did not end well.

      • JasonMNan says:

        Well, as a manufacturer currently based in Spain but with the family in Australia I am hoping Captain Stevens goes full steam ahead and craters the economy. Because with the current industrial rental market over there, it is a non-starter for manufacturers. I guess I will be here for some time…

      • nexus789 says:

        Non productive investment underpinned by banks borrowing debt from overseas so people can borrow and sell houses to other people that have borrowed debt. Don’t see what will go wrong as Australia is different.

      • Pfh007 says:


        When you achieve some success with your campaign to liberate the vacant bedrooms, empty nests and reform squatting and tenancy laws please get back to us but in the mean time stop rolling out that nonsense about the country is full of empty houses.

        Your anti-supply strategy is so transparent we can watch the TV behind you without squinting.

    • AngryMan says:

      If they lower rates, wont that trigger a bigger decline in $A. If it gets low enough that would trigger imported inflation at a level to big to ignore, if they follow their mandate they would have to put rates up.

      Dammed if you do, dammed if you don’t.

      Personally i think they will just reduce rates, and not do anything else.
      Its no longer about doing the right thing, its about short term political expediency.

      The RBA will do what Abbot tells them to do for his short term benefit.

      Especially with a crucial senate rerun in WA.

      Its funny how this seems to be shaping as a kind of parallel event to 1974

      • flawse says:

        “The RBA will do what Abbot tells them to do for his short term benefit.”

        Nope! The RBA will just run true to form…as you described

      • AngryMan says:

        Does not the govt of the day appoint the RBA governor and senior staff ?

        Correct me if am wrong in that.
        Surely that must carry with it a bias to conform to the govts expectations regardless of any advertised falsehood of being independent ?

      • flawse says:

        Maybe Angryman. Maybe! Frankly i don’t think Glen is a bloke to kow-tow. However, I do remember, a few years ago now, one staff member of the RBA being hauled over the coals at Treasury because he made some small casual remark about Govt policy that was resented by the Govt of the day.

        That said, I think the path you outline is just the RBA running true to form.

    • casewithscience says:

      Does the RBA distinguish between collateralised home rates and business rates? I thought the banks were responsible for that imbalance?

  2. Janet says:

    Cut rates, and your economy will be awash with mortgage applications. (NB: Where’s the funding going to come from? and at what exchange rate?!) You have a choice – obliterate your economy via the property market, or do something about it that isn’t interest rate related. I’m more confident than ever that I know which choice you are about to make! The wrong one…..and so I know what the outcome will inevitably be…..

    • nexus789 says:

      Debt funding will come from overseas. The banks will borrow to grow their loan books. They are mercenary and will do anything to create extra profits.

  3. Diogenes the Cynic says:

    Whilst your piece makes sense within the current economic paradigm that grips policy makers perhaps they could finally admit that their lever is broken? Interest rates are already low and are clearly stimulating the housing market along with the 17+ government policies designed to do the same. Enough already! That lever is broken.

    You have around one third of people owning their home free of mortgage and 30% of people renting – will cutting interest rates do anything to stimulate them? No. All this will accomplish is more financial repression and misallocation of resources as interest rates are already low enough (way too low in my view).

    • flawse says:

      For the RBA to admit that their lever is broken we ALL have to admit that the whole of modern economic theory is just so much baloney!
      You reckon the various distinguished professors, who have delivered us to this pretty pass, are ever going to admit that?

    • Stomper says:

      Yes, the lever is broken and unfortunately in the case of the RBA they will realise theirs has a knob on the end…


  4. Denis88 says:

    Two questions for the economists out there!

    1. How much fire power does the RBA have before it reaches ZIRP?

    2. How much are banks likly to pass on?

    • Janet says:

      (1) 2.5% and (2) All of it, and more. The last thing your banks can afford is to predicate a property price collapse. But guess what…..

      • Labrynth says:

        If interest rates drop due to a structurally weak economy who is going to lend money to our banks? Won’t the cost of funding increase and in turn interest rates for your average Joe regardless of what the RBA does?

      • Janet says:

        Precisely! If you lower interest rates, what is left to compensate the off-shore lender for their lending risk? An appreciating exchange rate is the blow-off valve! So as I suggested yesterday, you will get a cash rate at 0% ; an exchange rate through the roof; a dead manufacturing sector and unemployment to shocking levels….

      • flawse says:

        Shhhhhhhhhhhhhhhh!!!! You’ll scare the horses!
        Dammit! everyone believes the RBA is the ONLY relevant director of interest rates Nothing else matters.

      • Labrynth says:

        @ Janet

        Why would the exchange rate blow through the roof if off-shore lenders stop lending money to our banks? If anything the exchange rate would fall as the demand for $AU would dry up.

      • 3d1k says:

        Janet earlier this week I posted an excerpt from Doug Noland on the EM downside risk, much of which aligns with your comment – I suggested we may not be so different…

      • flawse says:

        Agree Labrynth
        I think what we’ll get is low IR’s…2.5% if janet is right
        -A lower exchange rate that is still held up by asset sales as our assets become absolute bargains to foreign interests.
        -An acceleration (if that’s possible) of foreign intersts’ buying of farmland and mines
        -Very much higher house prices driven by both overseas and local investors. Our own kids will be able to afford neither farms nor houses
        High inflation which the RBA will ignore. Inflation, one form and another, will accelerate to very high levels that is currently thought of as just not possible. This will be accompanied by major industrial disruption as those with the leverage seek to hold onto the gains they’ve made through increased ToT in recent years.
        - Pascoe saying that everything is fine.

      • Janet says:

        “…if off-shore lenders stop lending money to our banks?” And that leads to? The RBA has painted itself unnecessarily into a corner from which it can’t escape. If foreign banks fail to lend, then the property market collapses. If rates are at 0% and the funding is needed, then there is only on way left to attract those funds. A higher implied ‘interest rate’ has to be paid via the exchange rate. Essentially foreign banks will have to achieve a ‘sell A$ spot ( to provide the funding) and buy forward’ to realise a higher exchange rate at maturity. If that can’t be done through natural interest rate calculations,(which normally would lead to a lower forward rate) something else will achieve that goal ( thinking back to ’80′s tax avoidance here and my ageing brain is fading!. So best I stop!)
        Oh, and as I just saw Flawse correctly write – Flog off everything, and that shoves the exchange rate up as well!

      • flawse says:

        I seem to be caught up in some dastardly internet censorship maze that operates without any logic!

  5. Ortega says:

    Of course all this ‘necessitates’ rate cuts.

    But we’ve had them already. And clearly they haven’t had the desired effect.

    The RBA might actually understand that further rate cuts will not only do NO good, but might actually do harm.

    A property price godzilla has been unleashed.

  6. flawse says:

    Anyway I now owe plenty from buying Real Estate! Strewth i have to think up some credible reasons why RBA should (try to) cut IR’s

    Well there’s….hmmm no.
    But then if…..hmmm that won’t work
    But if we ignore…Nup!
    Umm it will be good for…nope that’s already done!

    Well dammit just lower them anyway. Lots of staff at RBA have IP’s. They MUST be cut!

  7. b_b says:

    Congrats to MacroBusiness on this call.

    You have been well ahead of the pack on this theme.

  8. Dave_Comments says:

    I don’t buy the RBA ‘switching to neutral’ because of a ‘growing confidence that the rotation away from mining investment’. I don’t even think it was a response to inflation. They saw the AUD getting lumped in with the emerging market basket, panicked, then shot themselves in the foot. Captain Glenn had it going just where we needed it to go (at a relatively low cost considering the delayed reaction) but flinched when it mattered. Australians will pay for that stuff-up.

    • flawse says:

      Is it possible that the Cap’n is looking at the future with more realistic eyes than most> Perhaps he actually has looked at the future and saw the smoke of inflation rising from behind the distant hills?

      Rba is between teh rock and the hard place. there are no good monetary options. Nor are there any fiscal options that the electorate will tolerate. We’re screwed.
      The answers lie back in time.

      • Dave_Comments says:

        Inflation in the future?
        Yeah stuff that, let the economy disintegrate today.
        No good monetary options? Maybe not but the one offered here over and over again (Low rates + Macroprudential) at least makes some sense. Sure beats the whole ‘we’re done, now let the chips fall where they may’ policy they’ve recently adopted.
        Or, you know… just peg the AUD (and peg it low)

        The electorate won’t tolerate anything other than a rosy fantasy. Its better to give them the bitter pill to swallow than they discover it crushed up on their fairy bread.

      • flawse says:

        “Or, you know… just peg the AUD (and peg it low)”

        There’s a whole lot of politically unpalatable steps have to be adopted to get that little proposal home as well! However if you really seriously wanted to tackle this problem for thre long term future then that is certainly where we should be headed. At the moment our dollar is fixed…it’s just not fixed by us!

        Low interest rates and macroprudential? I just don’t follow how, in a nation totally bereft of savings through the results of long-term negative to zero RAT interest rates, how that helps in the long term.
        There is too much theory goes on. From a practical viewpoint who is going to invest in the current climate in Australia? If we DO want to invest where does the money come from? It has to come from overseas. So do we just sell off something else?
        I realise this is a dynamic not static situation so lots of wheel will be turning at once. I’d observe this. Financial repression has not worked in the last six decades. What now tells us that even more severe financial repression in favour of more consumption will work now? Do we honsetly believe that we have invented the perpetual motion machine and that we don’t need real genuine savings for investment?

        Certainly first steps, as outlined so often by writers here, is to chop policies that favour housing consumption over ALL forms of investment.
        Adopt the policies as outlined by pfh so often. Never mind that his sensible proposals get totally ignored by everybody.
        Try to dismantle some of the anti-business and anti-investment pro impossibly high cost environment that we have constructed.
        Again it will be all too unpalatable for the electorate and indeed to most commenters here. Whoever attempts it will be labeled as some mad right wing extremist.

      • Dave_Comments says:

        Good points flawse.
        I guess its all academic at the moment anyway. We’ll see what is and what isn’t unpalatable sometime next recession I guess.

      • flawse says:

        Dave Thank you.
        “I guess its all academic at the moment anyway”
        Sigh! Ain’t that the truth!

        ” We’ll see what is and what isn’t unpalatable sometime next recession I guess”

        Oh I think we will all keep on blaming the ‘other’ bloke and keep on trying to do the same old thing..
        Deprressing eh!

      • md says:

        Yes, flawse, the right thing to do would be to deflate the bubble. If it happened quickly, we could go through the pain now, and come out better at the other end or we could do it slowly and prolong the agony. But both ways are unpalatable. So we’ll just kick the can down the road for another few years.

      • AF says:


        I think years is optimistic, I would wager that given the rumblings in China we could well be down to months.

      • md says:

        Months? Have you taken into consideration the wall of Chinese money flooding in?

      • Dave_Comments says:

        @ Flawse – Yep.

        @MD – Have you taken into consideration WHY that wall of Chinese money is flooding in? The dumb rich ones are buying into our bubble because they can see that many of theirs (eg. Hangzhou) are popping. The smart rich ones bought in post-pop America or Europe. The dumb ones don’t quite understand that our bubble is completely dependant on theirs. (Australia is what happens when you feed the Chinese property bubble after midnight)
        Are they really that dumb and desperate to get their money off the mainland? They sure are.
        Lots of these guys didn’t get rich by being geniuses – many of them are simple crooks. I know, I drink with several of them regularly.
        But I don’t see ruling class mainlanders fleeing being a sign of a prolonged Australian property bubble, I see it as a sign of an imminent hard landing for China.