Latest fall in Capex more nuanced than the headline figures suggest

Brendan Rynne, Partner, Chief Economist
Brendan Rynne, Partner, Chief Economist

Last week’s ABS data showing falling private sector capital expenditure (capex) got a lot of headlines about ‘darkening outlook for the economy’. Was the gloom justified?

To some degree, yes but the position is more nuanced than the headline figures may suggest. So while no decline is welcome, it should be put into perspective.

Firstly, new private capex in $ real terms in June was down around 2.5 percent on a quarterly basis, but was virtually flat year-on-year (y-y) and still up 3.1 percent on a cumulative 12 months basis (FY2018 compared to FY2017)

And it is difficult to judge quarterly movements on how investment activity is tracking – it is better to look at capex on a rolling 4-quarter basis so the data presents a full year’s worth of spending. From an economist’s viewpoint comparing y-y spending in real terms is better so you can take out price changes and look at comparable spending.

Breaking down the data, investment in plant & equipment has actually recorded strong growth of around 6.5 percent y/y to $14.7bn; it is investment in building and structures which has declined – by 4 percent q/q and 5 percent y/y to $16.7 bn.

There are also some notable state-based findings.

Albeit from a low base, South Australia, so often written off in economic terms, has experienced extraordinary growth in private capex over the past 12 months, up 23 percent on a cumulative 12 month basis – of which the majority, but not all, has been associated with spending on new buildings and structures.

NSW, the largest State economy, has for several quarters now recorded the highest level of private capex. We haven’t seen this since the start of the mining boom in 2006 when WA overtook NSW as the leading state for investment expenditure.

While NSW has reverted to its lead position, Victoria hasn’t recaptured its 2nd spot back and on balance seems unlikely to as Queensland and WA will continue to invest and re-invest in its mining sector.

Looking ahead, the ABS survey also captures future capex spending intentions, and assesses the historical relationship between what respondents expect to spend now for a full financial year and what they actually spend.

The survey starts asking respondents 18 months out what they expect full year capex spending will be – and as you’d expect respondents consistently misjudge what they’re going to spend. In good times its usually under and in bad times its usually over.

Based on the relationship between expected to actual spend on capex, KPMG Economics thinks that new private capex will likely be down by about 3 percent for FY19 to around $116bn.

The biggest anticipated decline relates to the development of building and structures for the mining sector, which is anticipated to come off by around 20 percent in FY19 compared to FY18. Spending by the manufacturing sector on Equipment, Plant and Machinery is also likely to be down about 4 percent y-y.

Putting this all in context, it should be remembered that private capex form only part of overall business investment – which itself represents about 12 percent of GDP. The survey of new private capex captures data on spend, while GDP is a measure of value added – which simply is wages, profits and some taxes.

So an expected small fall in a capex spending over the next 12 months will filter its way through to the national accounts, but it won’t be a 1-1 relationship. So join me and keep your eyes peeled on the quarterly national accounts tomorrow, for a fuller picture of the economy.

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