From Westpac:
The ABS survey of private business investment plans, the CAPEX survey, will provide some further guidance on growth prospects. The June quarter edition will be released on September 1. This will include Estimate 3 for 2016/17, as well as the June quarter 2016 result and thus the full year outcome for 2015/16.
Here we provide some potential scenarios for Estimate 3.
For a more detailed discussion of capex plans and the investment outlook see our Weekly.
There is no doubt that headline capex plans will be weak, very weak, dominated by the mining investment downturn. Recall that Est 2 for 2016/17 is $89bn, –14.6% vs Est 2 a year ago. In dollar terms, that is –$15bn, fully accounted for by mining, –$17bn.
The prospects for service sector capex spending in 2016/17 are less clear. The survey of three months ago gave mixed messages. The Estimate on Estimate comparison was positive, +2%. However, calculations which apply average realisation ratios (RRs) imply a negative result for 2016/17, –6%.
The June quarter survey was conducted in July and August. This follows the RBA’s surprise May rate cut and the follow-up cut in August. It is after the Federal election, with the Coalition returned with a majority of just 1 seat in the lower house and again requiring the support of others to pass legislation through the Senate.
The previous survey, the March update, was conducted during April and early May. That was in the lead-in to the annual Federal Budget, brought forward a week to May 3, and prior to the official announcement of the Federal election, made by the Prime Minister on Sunday May 8. At the time, there was uncertainty around public policy, with public debate about possible tax reform.
A recap of the March capex survey
Est 2 for 2016/17 was $89bn, –14.6% vs Est 2 a yr ago.
By industry: mining –32%; services +2% and manufacturing +14%.
However, applying avg RRs yields
Est 2 -21%; mining -41%, services -6%, and manufacturing -7%.Scenarios for Est 3 for 2016/17
Scenario 1: “neutral”
Est 3 of $97bn, –16% on Est 3 a yr ago,
a 9% upgrade on Est 2Scenario 2: “softer”
Est 3 of $93bn, –19.5% on Est 3 a yr ago,
a 4% upgrade on Est 2Scenario 3: “less weak”
Est 3 of $101bn, –12.5% on Est 3 a yr ago
a near 14% upgrade on Est 2The average upgrade between Est 2 and Est 3 for a given year is 7%, or 9% after allowing for the declining share of mining. In recent years, the upgrade has varied between 3% and 11%.
We lean towards an Est 3 for 2016/17 of around $97bn.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.Note that Estimate 1 and Estimate 2 have at times in the past proven to be wide of the mark, sometimes significantly so. Estimate 3 is historically somewhat more accurate, in part because the outcome of the previous year is now an actual, thereby assisting firms revise their investment plans.
The official family tend to focus on avg RR calculations, which currently show service sector capex plans as being weak at -6%. In our neutral scenario, we have assumed that Est 3 for services is $51.6bn, which is a 12.4% upgrade on Est 2 – an upgrade in line with the historic average. That would imply a still weak and disappointing -5% for 2016/17, based on avg RRs.
Some fundamentals are in place for an emerging and sustained uplift in service sector investment. Notably, demand across the non-mining economy grew by an above trend 3.8% over the past year. (Here we are referring to household and public demand, plus net service exports). Furthermore, some spare capacity has been absorbed, as evident in the private business surveys.
However, potentially impacting Estimate 3 is the lingering uncertainty around public policy following the close Federal election result. That could see businesses delay committing to additional investment. Moreover, the impacts of the mining investment boom and its subsequent unwind are far reaching. Some service sectors provide inputs into mining projects and these linkages are now a source of weakness.
Our central case forecast is for non-mining investment in 2016/17 to be unchanged in aggregate from that in 2015/16. We see ongoing uncertainty and the negative spillover effect from the mining investment downturn offsetting the positives from above trend growth in the non-mining economy.
Capex survey limitations
The survey provides only partial coverage of business investment. It excludes key growth sectors, health, education and agriculture and it excludes the key growth asset class of “intellectual property products” (dominated by computer software). The survey gave mining investment a 51% weight for 2014/15, whereas the true weight in the annual national accounts is 35%. In addition, early estimates of capex plans are, by their nature, an inaccurate read on the ultimate outcome. The extent of that error is unknown and varies across assets, industries and from one year to the next.
