Inflation concerns and questions over investment: comments on today’s ABS data on capex and business sentiment

The latest ABS survey shows how inflationary concerns are becoming more widespread across the Australian business community, with more than one-third of businesses now looking to increase the prices they charge for goods and services by more than their usual price adjustments.

Fuel costs and prices paid for goods and services those businesses use in producing their own final goods have placed the biggest cost burden on them – while staffing costs have also started to rise adding to margin pressures. The challenge to the business community however relates more to the fact that some of these cost increases were unanticipated.

This is further compounded by the fact for most of 2022 businesses have earned revenues below the levels they had planned to receive, suggesting business profitability for this year is being squeezed tighter than last year and what was expected.

Consistent with the Business Sentiment survey, the ABS also found that total private new capital expenditure fell by 0.3 percent in the first quarter of 2022. The floods in QLD and NSW were a clear drag on activity, especially on building construction and pulled the aggregate down.

Some of the non-flood related challenges that caused the decline in new construction activity in the March quarter of this year are likely to remain for some time. Supply chain problems, especially those associated with receiving goods from China, persist – while a tightening labour market will continue to cause difficulties in accessing the staff required to deliver new construction activity to the planned levels.

Notwithstanding these issues, the overall data released by the ABS suggests the business community remains fairly positive with respect to their planned investment outlook. The forecast for total private spend for FY22 is now nearly $143 billion, up just over 13 percent from FY21. Looking ahead, FY23 is expected to be up around 9.5 percent on the current year on headline values.

KPMG believes however these expectations should be considered both in the light of historic realisation rates and the ability of the market to be able to deliver these outcomes – given the current challenges of supply chain disruptions, labour market tightness and overall increase in cost pressures.

Today’s data shows divergent results between the two major types of capital expenditure categories; new building and structures fell by 1.7 percent while expenditure on new plant and equipment increased by 1.2 percent. Challenges surrounding accessing building products from China and labour shortages in the construction sector are the drivers behind the decline in building activity in the March quarter 2022 – which were confirmed in yesterday’s release on completed construction work, which fell 0.9 percent during the same time period.

There is also a large variability occurring by industry and by state. South Australia and Tasmania saw declines in spend in the March quarter of -7.6 percent and -4.8 percent respectively, while Information, Media and Communications and Accommodation and Food Services experienced declines in spend of -25.2 percent and -12.3 percent respectively.


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