The Australian capex survey results for the December quarter are disappointing on all levels. Capex remains firmly lower than last year, forecasts are for further declines in the next two quarters and the first view of 2017 looks like capex will continue to fall. There is one small bright point – actual December capex increased over September. This may be positive for the December quarter National Accounts. The reason for the increase can be traced back to activity in NSW and unfortunately, the forecasts by business suggest that it is not likely to continue.
Estimate 5 for capex in the 2015/16 financial year highlights that total capex is still expected to fall by -17% or $26.6b below last year
Expected capex for the full financial year to June 2016 is forecast to come in at $124b, which is 17% below last year. So far, the Sept plus Dec 15 capex actuals are tracking at -17.8% below the same two quarters last year in real terms and -15% in nominal terms.
The benefit of estimate 5 data is that it is made up of 50% actuals and 50% forecast. The forecast period now looks out over a shorter time frame (next 6 months) so is becoming a more accurate view of capex plans:-
The decline in capex for this financial year, at estimate 5, is looking like it might reach levels not seen since the last recession in 1991/2.
It doesn’t matter whether you look at capex expectations by industry or asset type – ALL areas are contributing to the decline. But the decline is being led by Mining and Buildings and Structures:-
The only positive in this is that expected capex in Manufacturing doesn’t look like it will decline as much as it did last year. Apart from that, capex in Other Selected Industries and Mining will fall faster than last year as well.
But are the actuals in the GDP results following the capex survey? The data is only up to the Sept qtr and for the moment, yes, private capital investment is following the lead of the capex survey. But we haven’t seen the larger falls in capex that the survey is forecasting. That said, capex has been slowing, then declining since 2012:-
At estimate 5, we have two quarters of actuals and two quarters of forecasts for capex. The Dec quarter actuals came in higher than the Sept qtr actuals and this could be positive for GDP in the Dec qtr. I’ll come back to this in more detail shortly. But this means that the bigger falls in capex are forecast for the last two quarters of the 2015/16 financial year (which I’m calling ‘Half 2’ – H2 in the table below). From ABS 5625.01(a) and 5625.01(b):-
Actual Capex for H1 v Forecast Capex for H2 2015/16 Financial Year
Source: ABS, $ M, original, current prices
Across every industry, businesses are forecasting capex in the March and June 16 quarters to be between 15 and 20% below capex for the first half.
These forecasts for the March and June 16 quarters do not compare well with actual capex for the same quarters last year either:-
Actual Capex for Mar & Jun 2015 v Forecast Capex for Mar & Jun 2016
Source: ABS, $ M, original, current prices
I’ve outlined before that the Capex Survey (what this post is based on: ABS 5625) doesn’t cover all industries and tends to overstate the size of Mining. The industries that are excluded are: Agriculture, Forestry and Fishing (Division A), Public Administration and Safety (Division O), Education and Training (Division P), Health Care and Social Assistance (Division Q), Superannuation Funds (Class 6330).
The size of the capex change tends to be overstated in the survey compared to the actuals in the National Accounts, but are directionally in line. The Capex survey data is used in the development of the quarterly National Accounts.
The first look at expected capex for 2017 looks just as poor
“Non-mining business investment is forecast to pick up in the second half of the forecast period, reflecting the improvement in domestic demand”, RBA, Statement on Monetary Policy, February 2016
Estimate 1 for the next financial year 2016/17 was also released with the December data. This is a 100% forecast and is looking further out to the full financial year 2016/17, so its accuracy is lower than later estimates.
The view at estimate 1 tends to understate final capex. So adjusting the estimate using the 2016 realisation ratio for estimate 1 (which bumps up the estimate by 20%), we get our first capex estimate for 2017 of $99b. Let’s assume that 2015/16 capex spend comes in at the estimate 5 forecast of $124b. That means that estimate 1 is pointing to a further 20% fall in capex for 2016/17.
The falls in capex at estimate 1 are across the board as well:-
- Mining – estimate 1 adjusted upward based on a +3% realisation ratio = $35b, which represents a further 33% decline on current forecast for mining capex of $53b in this 2015/16 financial year
- Manufacturing – estimate 1 adjusted upward based on a +27% realisation ratio = $8.3b, which represents a further 1.1% decline on the current forecast for this financial year
- Other Selected Industries – estimate 1 adjusted upward based on a +49% realisation ratio = $62b, which still represents a further 1.5% decline on the current forecast for this financial year
(The realisation ratios that I’ve used here are the larger of the last 5 years)
But according to the RBA in the latest Statement on Monetary Policy Feb 2016:-
“The ABS capital expenditure (Capex) survey of investment intentions and the Bank’s liaison point to a sharp fall in mining investment in 2015/16. The subtraction from GDP from lower mining investment is expected to peak this financial year.” RBA, Statement on Monetary Policy February 2016
Here’s hoping that the later estimates of the 2016/17 financial year capex improve, because so far, the falls for next year are looking just as bad as this year.
But actual capex in the survey INCREASED in the Dec quarter
It looked like there was a spot of good news in the capex survey data. Actual capex in the December quarter grew by +0.8% in real terms. A turnaround possibly? It unfortunately didn’t take long to see that this is all driven by one state – NSW, which contributed +1.97% points to the +0.8% quarterly increase in actual capex. The only other states to make a positive contribution to growth in the latest quarter were VIC and SA – and contribution to growth was small at best.
But its nots looking like NSW is on a new investment trajectory either – the latest quarter of higher growth seems like a function of a lower result in the Sept qtr.
Capex in NSW is still 8% below its 2011 peak in real terms and 4% below the Dec 14 quarter (same time last year).
Reverting to current prices, capex in NSW for the next two quarters is also forecast to be 18% lower than in the actuals in the Sept15/Dec15 quarters. NSW capex in Mar 16 + Jun 16 is forecast to be $11,051m versus the Sept 15/Dec 15 actuals of $13,544m. In other words capex in NSW is not likely to continue increasing in this financial year.
With capex falling and business continuing to forecast lower capex for 2017, the signs for the Australian economy are not good. While mining has mostly been leading the falls, the declines in capex are now evident many across the other industries – which suggests that the ‘transition’ has so far been tepid at best. Business remains wary of investing to increase capacity in light of overall lower growth.