There are two important features of private capital investment in Australia at the moment. The first is the declining contribution of private investment to economic growth over the last three (3) quarters. The second is the unwind of mining capex growth which is currently underway. The two are related, of course. Over the last few years, monetary policy has been geared towards creating the financial environment to encourage a ‘re-balancing’ of private business investment towards non-Mining capex in order to off-set the much anticipated declines in Mining capex. The June survey of private capital expenditure shows that we are, to some degree, seeing growth in non-mining investment via construction, namely dwelling construction. The modest growth in the June quarter should have been no surprise because growth in new credit for business has been accelerating over the last year, as several previous posts have highlighted. But growth in new credit for business still remains well below pre and post GFC highs suggesting that business investment remains subdued. But is it really enough to say that a continued and increased emphasis on dwelling construction qualifies as a ‘re-balancing’ for the economy?
“When we look ahead, a key feature of the outlook, as everyone knows, is that the capital expenditure phase of the mining boom is winding down and the export phase is gearing up. The fall off in investment spending by resources companies has a long way to go yet, and it will probably accelerate in the coming year. This impending further fall is captivating most of the commentators right now. Meanwhile, growth in non-mining activity has been increasing. A recovery in dwelling investment is well underway, with spending in this area up by about eight per cent over the past year. Forward indicators for non-mining business investments suggest a modest improvement over the coming year, though intentions have so far remained somewhat tentative in this area.”
Glenn Stevens, Governor RBA, testimony to the Standing Committee on Economics, August 20, 2014
The survey of capital expenditure is not a complete picture of all sectors actual or expected investment intentions. It’s useful to understand what is included in the survey in order to understand the numbers. One way the survey measures capital expenditure and intentions is by ‘type of asset’, specifically, 1) Buildings and Structures and 2) Equipment, Plant and Machinery:-
Buildings and structures: Includes industrial and commercial buildings, houses, flats, home units, water and sewerage installations, lifts, heating, ventilating and similar equipment forming an integral part of buildings and structures, land development and construction site development, roads, bridges, wharves, harbours, railway lines, pipelines, power and telephone lines. Also includes mine development (e.g. construction of shafts in underground mines, preparation of mining and quarrying sites for open cut extraction and other developmental operations primarily for commencing or extending production). Excludes purchases of land, previously occupied buildings and speculatively built projects intended for sale before occupation. (Source: ABS)
Equipment, plant and machinery: Includes plant, machinery, vehicles, electrical apparatus, office equipment, furniture, fixtures and fittings not forming an integral part of buildings, durable containers, special tooling, etc. Also includes goods imported for the first time whether previously used outside Australia or not. (Source: ABS)
On a real value basis, the capex survey represents approx. 43% of the value (real) of Total Private Fixed Capital Formation (GFCF) and 60% of the Total Business Investment element of total private GFCF (full year at Mar 2014) in the National Accounts.
The other way the survey measures capital expenditure and intentions is by ‘industry’. The National Accounts estimates include capital expenditure by all private businesses including agriculture, forestry and fishing, education, and health and community services industries and capital expenditure on dwellings by households. Data for these sectors are excluded from the capex survey.
June Survey Results – Actual Private Capital Expenditure
Where possible, the figures used are ‘chain volumes’ to remove any price effects.
There is a significant difference in direction between the trend and the seasonally adjusted headline growth figure for the June quarter – I’ll present both throughout this post.
- Seasonally adjusted, total capex grew by +1.1% (Jun ’14 v Mar ’14)
- Using trend data, total capex declined -1.7%
Looking at both measures over time provides a better sense of how they move together and how the seasonally adjusted data tends to be a little more volatile.
No matter which data you look at, trend or seasonally adjusted, there is a common theme at an industry level – Mining and Manufacturing continue respective recent declines and the growth trajectory continues for Other Selected Industries:-
Below is a more detailed breakdown at industry level looking at both seasonally adjusted and trend data from the recent capex survey:-
|Annual $’s M||Annual % Chg||Qtr % Chg
(Jun 14 v Mar 14)
|Qtr Chg $’s M’s|
|Other Selected Industries||$57,769||+2.0%||+3.4%||+$491|
|Other Selected Industries||$57,591||+2.0%||+1.8%||+$263|
The impact of the decline in Mining capex over the last year is evident with total capex declining by -3.5% (seas adjusted). Only Other Selected Industries has been a positive contributor to capex over the last quarter and over the last year (looking at both measures), but this hasn’t been large enough (yet) to fill the gap left by the decline in mining investment (when using only the survey values).
There are two ways to drill down into the composition of growth in Other Selected Industries. The first is by breaking down Other Selected Industries into asset type. Using this view, its clear that Buildings and Structures have been the major driver of growth over the last four (4) quarters and growth continues to accelerate. Growth in Other Selected Industries – Equipment, Plant and Machinery remains lacklustre. The bigger of the two elements is Plant, Machinery & Equipment, but the majority of the growth in Other Selected Industries is coming from Buildings and Structures.
The second view of Other Selected Industries is by industry type. Using this view shows that the main contributor to growth was from Construction.
Cross referencing these results with the respective elements of the more complete view of Private GFCF in the National Accounts highlights the role that dwelling construction is playing overall. There has been a significant reversal between the growth in dwelling and the growth in non-dwelling construction & investment over the last two years. Note – I’ve used the ‘non-dwelling construction – new buildings’ element of the total ‘non-dwelling construction’ component of Private GFCF in order to remove the large influence from Mining in the construction engineering component.
The slowing growth in non-dwelling construction and the accelerating growth in dwelling construction over the last two (2) years, suggests that so far, ‘re-balancing’, or accelerating growth, has been focused on residential dwellings. Over the last year, GFCF dwellings has contributed twice the amount to total growth in Private GFCF than non-dwelling construction. Over the latest quarter (v. same qtr PY), that figure jumps to just over 7 times the contribution to GFCF growth. The circled area in the chart below highlights the shift in growth between the two elements:-
The National Accounts breaks down investment spending into Dwellings (new and used dwellings and alternations and additions made by households) and Total Business Investment, which includes the non-dwelling construction.
In the recent past, total Private Business Investment has been the major driver of the historically high levels of investment growth – due to Mining. Over the last ten (10) quarters though, we’ve started to see the contribution of total private business investment to growth completely reverse. Its gone from driver of growth, to driver of decline in total Private GFCF (grey bars in the chart below):-
Over the same last 3 quarters, you can see that the dwellings component (blue bars, above) has started to make a much larger, and growing, contribution to overall growth in Private GFCF.
Is the growth in ‘Other Selected Industries’ the start of the rebalancing that the RBA has been looking for?
The bigger question is whether this truly represents a rebalancing of investment for the future of Australia. This is a matter of opinion. Most of the growth in private sector credit is already going into residential mortgages (both owner occupier and investor) – so this private construction investment data seems to suggest that we are merely continuing to focus on residential dwellings. The upside is that new dwelling construction is likely to result in employment growth. But continued growth in residential dwellings will rely on continued acceleration in household debt – and there is some risk associated with that given that we are already close to historically high levels of household debt.
The issue remains that business investment has continued to make a negative contribution to growth over the last three (3) quarters. If business investment on aggregate is not growing, and business is not increasing its productive capacity, then this will likely have important implications for the growing pool of underemployed people in the Australian economy (see latest post on employment). The economy is currently growing, but below the level required to start to absorb some of this growing underemployment.
“But the thing that is most needed now is something that monetary policy cannot directly cause. What I mean is we need more of the sort of so-called ‘animal spirit’, or confidence if you like, that is needed to support not just a repricing of the existing stock of assets, but the investment that adds to that stock of physical assets. There are some encouraging signs here, as you said, Chair. Nonetheless, if reports are to believed, many businesses remain intent on sustaining a flow of dividends and returning capital to shareholders and are somewhat less focused on implementing plans for growth. Any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand. That is actually not a new phenomenon; it is in some respects pretty normal at this point of the cycle. There is always a period in which people can see that many of the conditions for expansion are in place but are not yet fully confident that it will happen. This is not confined to Australia: the gap between financial risk taking, and there is plenty of that in the world, and real economy risk taking is a gap that we observe around the world.”
Glenn Stevens, Governor RBA, testimony to the Standing Committee on Economics, August 20, 2014
Expected Capex 2014/15
We continue to pin our economic future on dwellings and so far, expected capex for the 2014/15 financial year sees little change in that direction. At June 2014, the survey shows that expected total capex will come in at approx. $14b lower than 2013/14 financial year. This figure has been adjusted using the realisation ratios.
Taking a longer term view, this is how the growth of the 2014/15 financial year growth (decline) compares to the historical growth in total capex in the survey.
There is no doubt that the major contributor to the year on year decline is the slow-down in Mining capex. The worrying element is that, based on the capex expectations, the recent growth in Other Selected Industries – Buildings and Structures is not forecast to accelerate in the 2014/15 period.
Note that some totals will not add to the full amount due to the application of realisation ratios.
|Est 3 – Total 2014/15 Fin Year $M||Realisation Ratio||Adjusted 2014/15 Total||2013/14 Fin Year Actual||Diff in $’s|
|Other Sel Buildings/Structures||25,564||0.99||25,308||23,154||+$2.1b|
|Other Sel Equip/Plant/Mach||30,157||1.28||38,601||34,048||+$4.5b|
|Total Buildings & Structures||98,930||0.91||90,026||106,740||-$16b|
The only forecast increase in capex for the 2014/15 financial year is for Buildings & Structures in Other Selected Industries in the table above (before the application of the realisation ratios). Based on the size and direction of these figures, it’s hard to see how the non-resources sector will in fact fill the gap created by the slow-down in Mining capex. It’s true that the survey isn’t the entire view of capex, but I wonder to what degree it’s indicative of the general direction of intentions and sentiment across the economy. We can only hope that the sectors not covered in the capex survey – agriculture, forestry and fishing, education, and health and community services – will take a far more optimistic and aggressive approach to capital investment in the coming year.