From Westpac:
The ABS survey of private business investment plans, the CAPEX survey, will provide some further guidance to growth prospects. The September quarter edition will be released on November 26, with responses received over October and early November.
This update will include Estimate 4 of capex plans for 2015/16. Here we provide scenarios for the 4th estimate.
The initial 3 estimates have been particularly weak, at -18%, -24% and -23.4%, with falls across services and manufacturing, as well as a plunge in mining as work on major projects nears completion.
We expect the 4th estimate to be an upward revision – but only at the margin – such that the survey remains downbeat for now.
Private business surveys – such as the NAB – are supportive of both of these developments. The NAB survey reports that, since March, business conditions have been consistently at levels above their long-run average, particularly in NSW and Victoria. At the same time, the survey reports that year-ahead capex plans for the service sectors are lagging the lift in business conditions – in part held back by transport & utilities (industries which have a high capex weight).
For 2015/16, (1) our view on Australian growth incorporates a significant contraction in business investment; (2) but a fall that is not as sharp as suggested by the capex survey at present. We are forecasting a 7.5% decline in total business investment for 2015/16.
We are mindful that: (a) the capex survey overstates the weight of the mining sector by a considerable margin; (b) capex excludes sectors (education and health) and assets (computer software) which are likely to expand investment; and (c) business conditions across the service sectors have improved, which will likely see businesses respond by lifting equipment spending – at odds with the negative view in the capex survey at present.
A recap of the June capex survey
Estimate 3 for 2015/16 is $115bn, which is 23.4% below Est 3 for 2014/15.
By industry, Est 3 on Est 3 was: mining, –37%; services, –6%; and manufacturing, –1%.
The survey was conducted during July and early August. This occurred as the Chinese sharemarket plunged, unnerving businesses and consumers across the globe. For Australia, business confidence measures dipped in July and August, although business conditions were resilient, holding at above average levels.
Scenarios for Est 4 for 2015/16
Recall, that
2014/15 Est 4 was $152n, a 1.4% upgrade on Est 3
2015/16 Est 3 was $115bn, –23.4% vs Est 3 a year ago
Scenario 1: “neutral” Est 4 of $117bn, –23.4% on Est 4 for 2014/15 a 1.5% upgrade on Est 3
Scenario 2: “softer” Est 4 of $111bn, –27% on Est 4 for 2014/15 a 3% downgrade on Est 3
Scenario 3: “less weak” Est 4 of $123bn, –19% on Est 4 for 2014/15 a 7% upgrade on Est 3
Note, that typically in any year, Est 4 is higher than Est 3. This is largely because the service industries upgrade their plans around this time, as the financial year in question gets underway. Investment by the service sectors is dominated by equipment spending and a commitment to undertaking such spending can be made with shorter lead times. Although, this pattern between Est 3 and Est 4 has been less pronounced in recent years as the share of mining capex increased.
Focus on the service sectors
Investment intentions of the service sectors will be of particular interest. The emergence of a sustained upswing in investment by the service sectors is a key element in the economy’s successful transition from growth led by mining investment to strength across the broader economy. The RBA’s major interest will be in this services number and, if there were to be a deterioration to say -10% or worse, that would come as a surprise.
For 2015/16, the capex plans for the service sectors are disappointingly weak, with readings to date of: Est 1, -4%; Est 2, -11% and Est 3, -6%. Somewhat odd, the mix of expectations by asset in the capex survey is the opposite to our priors, with building & structures at +4% (yet non-residential building approvals are well down from their highs) and equipment, -14% (yet equipment spending by the service sectors advanced in 2013/14 and strengthening business conditions suggest that this trend should continue.
As noted above, there is the risk that service sector capex undershoots the improvement in business conditions. In part this is because of negative spill-over effects from the mining investment downturn. The transport sector, which is in services, has negative capex plans for 2015/16, with some projects in this sector (ports and rail) mining related. Utilities, another service sector with a relatively high capex weight, is also downbeat on the investment spending outlook for 2015/16.
