Capex preview

Via the excellent Gareth Aird at CBA:

The Q1 20 ABS capex survey, due on 28 May, will contain an updated estimate of 2020/21 capex plans.  Big downgrades are expected for both mining and non‑mining firms although estimating the magnitude of the downgrades is very challenging.  We suspect that there will be a big range in the market forecasts that highlight the difficult task at hand for economists.

Timing is everything with surveys and the starting point for estimating the 2020/21 spending plans is to look at when the survey was taken.  The ABS capex surveys are taken each quarter and returns are completed in the 8 or 9 week period after the end of the quarter to which the survey data relate.  This means that the data that we will be looking at will have been collected from 1 April until around 20 May.  Cautious optimism around the outlook has only crept in over the last few weeks and so a big chunk of responses would have been collected when the economy was at its low point in April.  It was hard to see much light at the end of the tunnel over most of April. 

The economic outlook is still highly uncertain and this will weigh heavily on investment decisions.  But we suspect that if the entire survey had been taken over the past week rather than the previous 8‑9 weeks we would get a better set of numbers than what the ABS will deliver next week.  As such the results will need to be treated with a degree of caution as we suspect they will look, quite frankly, terrible.   

On the data front the business surveys are important when thinking about this capex report.  The CBA composite PMIs were dire over both April and May, albeit that business confidence picked up in May from very low levels.  The NAB Business Survey has been equally shocking.  The weakness in private activity will translate into significantly lower plans for capex, particularly for non‑mining capex firms.

We have pencilled in a second estimate of non‑mining capex of $A78bn that is a 13% fall relative to the first estimate, but one that implies a 20% downgrade in 2020/21 given firms are usually upgrading between estimate one and two.  For mining investment we have forecast an estimate of $A25bn which is a 35% decline on estimate 1.  The plunge in the price of oil means that some major gas projects will either be delayed or cancelled.   Overall we think that the total capex numbers will imply a 17% fall in investment relative to the expected 2019/20 outcome.  We have downgraded our estimates for 2019/20 by 2.5% which implies a 10% contraction in capex over Q2 20.  We assess the balance of risks to the 2020/21 estimate to be to the downside.

Q1 20 outcome

As for the actual volume of capex spend, we expect to see a fall of 2.0% after a 2.8% contraction in Q4 19.  The actual spending data will help us to firm up our estimates of Q1 20 GDP (due 3 June).  At this stage we are expecting a very small positive outcome of GDP growth of 0.1%.  In many respects the Q1 outcome is largely irrelevant now given it mostly predates the impact of the COVID‑19 pandemic on the Australian economy.

David Llewellyn-Smith
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Comments

  1. DingwallMEMBER

    In many respects the Q1 outcome is largely irrelevant now given it mostly predates the impact of the COVID‑19 pandemic on the Australian economy.

    They keep saying the data is irrelevant yet the bots feed off them. While we keep getting announcements pre-COVID or being hidden behind numberwang reporting, the poo will keep being pushed higher.

    How are the AUD short levels as of Friday ? They must be almost completely purged …………..

    • DominicMEMBER

      To some extent we’re the cleanest dirty shirt so that would explain some it — that and the risk-on trade

  2. Goldstandard1MEMBER

    If you are predicting a 0.1 increase and glass is always half full, I’m guessing it’s a slight neg in reality and it will be an absolute surprise!