Thanks to Westpac:
The ABS CAPEX survey of private business investment plans will provide some further guidance on growth prospects.
The June quarter update will be released on August 29, including the outcome for the 2018/19 financial year and the 3rd estimate of plans for 2019/20.
We note that Estimates 1 and 2 for any given year can be an unreliable guide to actual spending. Plans tend to progressively become more reliable after the outcome for the year prior is a known – that is, from Estimate 3 on. Hence, this survey takes on greater significance.
We expect an Est 3 of around $113bn, +10% vs Est 3 a year ago.
If so, that would be a downgrade from Est 2 on Est 2 of +12.8%.
We see the risk of mixed messages – suggesting that the investment outlook is uncertain. In particular, calculations based on average realisation ratios may imply only a small increase in capex in 2019/20.
March capex survey: a recap
The headline figure for 2019/20 was a positive one.
Est 2 for 2019/20 is $99bn, +12.8% vs Est 2 a year ago.
Est 2 on Est 2 is positive for each industry: mining particularly so, at +21%; services, +9.6%; and manufacturing, +6.5%.
By contrast, the detail was downbeat (on our reading) – thereby providing mixed messages. With these mixed messages the investment outlook remains uncertain.
We assess that the Est 2 vs Est 2 figure is flattered by base effects. That is, the Est 2 of a year ago was relatively low compared with the likely outcome for the full year.
Calculations based on average realisation ratios (RRs) indicate that Est 2 for 2019/20 implies only a small rise in capex spending, in the order of 1.3%. That is a sluggish outlook, well below the views of the RBA and the Commonwealth Treasury.
By industry, avg RR calculations indicate: mining, +6%; services +0.5%; and manufacturing, -7%.
A weak spot is plans by the services sector for equipment spending, at -5%.
The timing of the March survey was significant, being conducted in April and early May. There was heightened uncertainty ahead of the May 18 Federal election. In this environment firms may have been reluctant to commit to equipment spending, awaiting greater clarity on public policy.
June capex survey
The June quarter survey was conducted in July and August.
There is now greater clarity around public policy following the election outcome – hence, there is potential upside to equipment spending plans of the service sectors.
However, other risks have emerged. We expect that global uncertainties, which have increased with the escalation of the trade and technology war, and the weak domestic environment, will weigh on investment plans.
Estimate 3 for 2019/20
If Est 3 is to be 12.8% above Est 3 of a year ago, then plans will need to be revised to $116bn.
That represents a 17% increase from Est 2 of $99bn.
The historical experience of the survey is that revisions between Est 2 and Est 3 in a given year are – on average – less than this.
The average revision for the past five years is 14%, while the decade average is 11.5%.
An above par revision appears unlikely, in our view, in the current backdrop – a global slowdown, with heightened downside risks, and sluggish domestic activity.
We favour a somewhat more modest revision of around 14%, to $113bn – in line with the average of the past five years.
Based on average realisation ratios, we estimate that this implies capex spending in 2019/20 will rise by only 1.5%. Hence, the mixed messages and the uncertain outlook persist.
In our scenario of $113bn and based on avg RRs, mining capex is positive, at around +5%, but services is soft at +1% (with gains in building & structures offset by weakness in equipment), and
manufacturing is weak at -7%.We note that the calculations in this scenario are sensitive to:
(1) any surprise in the outcome for the base year – with the actual outcome for 2018/19 to be released in this update; and
(2) the survey detail by industry and by asset.To recap:
Est 3 of around $116bn, is a broadly ‘neutral’ result; (Est 3 on Est 3 is +12.8%, matching the Est 2 on Est 2 figure)
We expect an Est 3 of around $113bn, (Est 3 on Est 3 at +10%).
Business investment outlook, the Westpac view
On balance, we expect real business investment to rise by around 1.5% in the 2019/20 financial year (with nominal spending up by a little over 3%). This is a less upbeat view than the Commonwealth Budget forecast for real business investment of +5%.
Some key dynamics are shaping our view on the outlook.
(1) Mining investment is likely to see an emerging uptrend in 2019/20, following 6 years of decline. This is led by a number of iron ore projects which have been committed to in response to recent elevated prices. How quickly the lift emerges is clouded by the very tail end of the wind-down of work on the gas projects.
(2) Non-mining investment in infrastructure is likely to rise in 2019/20 with a focus on transport projects (a spill-over from the upswing in public investment) and a focus on renewable energy.
(3) Non-mining investment in equipment is likely to be broadly flat given sluggish consumer spending and the deteriorating global outlook.
