Capex preview

From Westpac:

The ABS survey of private business investment plans, the CAPEX survey, will provide some further guidance to growth prospects. The March quarter edition will be released on May 26. This will include Estimate 6 for 2015/16 and Estimate 2 for 2016/17.

Recall that:
Est 5 for 2015/16 is $124bn, –17.8% vs Est 5 a year ago, and
Est 1 for 2016/17 is $82.6bn, –19.5% vs Est 1 a year ago.

We expect the survey to remain downbeat, with
Est 6 for 2015/16 at $124bn, –17.4% vs Est 6 a year ago, and Est 2 for 2016/17 at $86bn, –18% vs Est 2 a year ago.

Mining investment returning to pre-boom levels is the key dynamic. Also, a sustained upturn in service sector investment has yet to emerge, despite an improvement in conditions and an associated strong increase in employment.
The March survey was conducted over April and early May. Private business surveys report that business conditions and confidence improved over the past three months, rebounding from a softer spot early in 2016. Recall that in January there was heightened market volatility, with a sharp equity sell-off on China growth concerns. That said, domestically uncertainty remains with the Federal Election campaign now underway.

A recap of the December capex survey
Estimate 5 for 2015/16 is $124bn, –17.8% vs Est 5 for 2014/15. By industry: mining –30%; services –4%; and manufacturing –2%.
Estimate 1 for 2016/17 is $82.6bn, –19.5% vs Est 1 for 2015/16.
By industry: mining –36%; services –2.5% and manufacturing +9%.
We focus here on Estimate 2 for 2016/17, assuming that Estimate 6 for 2015/16 will not alter the current picture.

Scenarios for Est 2 for 2016/17
Scenario 1: “neutral”
Est 2 of $84bn, –19.5% on Est 2 for 2015/16,
a 2% upgrade on Est 1

Scenario 2: “softer”
Est 2 of $79bn, –25% on Est 2 for 2015/16
a 4% downgrade on Est 1

Scenario 3: “less weak”
Est 2 of $89bn, –14% on Est 2 for 2015/16
a 8% upgrade on Est 1

The “typical” upgrade between Est 1 and Est 2 for a given year is in the range of +2% to +5%. In 2015/16, there was a 2% upgrade for total capex to $104.5bn, including, by industry, a 1.5% downgrade for mining, a 5.5% upgrade for services and a 6.5% upgrade for manufacturing.

We lean towards an Est 2 for 2016/17 of $86bn, which would be a 4% upgrade on Est 1 and 18% below Est 2 a year ago.

Comments
Investment intentions of the service sectors will be of particular interest to policymakers, including the RBA. 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, forecasting real GDP growth of 3.0%yr for December 2017 and 3.5%yr for June 2018, will be looking to plans for 2016/17 for any evidence of a lift in service sector investment. Although, be mindful that Est 1 and Est 2 of service sector capex plans are often unreliable.

Low interest rates and a low dollar are supportive of conditions across the broader economy. Indeed the strengthening of business conditions over recent months, as reported by private business surveys, points to the potential for the services sector to upgrade their capex plans for 2016/17 – with a focus on equipment spending. Of note, the improvement in business conditions has broadened, with a lift evident for the transport industry, which is relatively capex intensive.

Having said that, we see the scale of any upgrade to service sector investment plans as being tempered by: uncertainty ahead of the July 2 Federal Election; and the looming downturn in commercial building activity, with non-residential building approvals 20% below the levels prevailing early in 2014.

The service sector capex plans for 2016/17 by asset are currently –9% for building & structures and +3.5% for equipment, to give –2.5% in total. Potentially, Estimate 2 of service sector plans could be upgraded to flat in total, with equipment raised to a relatively positive +8% but building & structures remaining weak, around –8%.

Mining capex plans for 2016/17 are expected to remain around the –36% reported for Estimate 1, a downturn which is factored into our central case forecasts. Weakness is locked in with projects currently underway nearing completion and the absence of any new major projects.

Capex survey limitations
We are mindful that: (a) the capex survey overstates the weight of the mining sector by a considerable margin; and (b) the survey excludes sectors (education and health) and assets (computer software) which are likely to expand investment.

As such, the capex survey headline of –19.5% for 2016/17 is not a reliable point estimate for total business investment (as reported in the national accounts). Westpac Economics is forecasting business investment to fall by a little in excess of 7% in 2016/17, with mining down 34% and non-mining edging 2.5% higher.