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First Impressions: Australian Q3 Capex

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Fundamental analysis of Forex market

Q3 capex spend down 0.2%, led by equipment, -3.5%. Capex plans for 20119/20 downgraded – weakness in services.

September quarter

  • Capex spending edged lower in Q3, -0.2%, broadly as anticipated (market median flat & Westpac -0.5%).
  • Equipment spending declined, albeit a somewhat sharper fall than we anticipated, a -3.5% vs a f/c -1.5%.
  • Building & structures rose, up by 2.7%. We anticipated a flat result and the Construction survey – which we feed into our national accounts forecast – fell, down by -1.0%.
  • By industry: mining, +3.9%qtr, +1.2%yr; and services, -2.7%qtr, -3.0%yr.
  • Mining capex appears to have already turned the corner – with a flat March followed by gains in June and September – the strongest run since 2012.
  • Services capex appears to be in retreat – with declines for 3 consecutive quarters (for the first time since 2011/12).

September quarter GDP forecast

– advertisement –
  • Our forecast for Q3 GDP remains 0.6%qtr, 1.8%yr, with risks tilted to the downside.
  • The arithmetic is: domestic demand, +0.2%; inventories, +0.2ppts; net exports, +0.2ppts.
  • We highlight that, on our numbers, domestic demand is weak, up only 0.2%qtr, 0.8%yr and private demand has hit the wall, flat qtr, -0.2%yr. Private demand last expanded in the June quarter 2018.
  • A GDP preview will be published tomorrow.

2019/20 capex plans

Overview

Capex plans for 2019/20 have been downgraded, largely led by services. Business capex plans are lopsided, with strength in mining and weakness in services.

This is consistent with the fundamentals (a challenging and uncertain global backdrop and weak demand domestically) and consistent with our reading of the economy.

This latest capex survey update poses material downside risks to the forecasts of the RBA and the Federal Budget. The RBA has real business investment lifting from 3.2%yr in December 2019 to 6.2%yr in December 2020. The Federal Budget has real business investment increasing by 5% in 2019/20 (mining +4% and non-mining +5.5%).

The detail

Recall that Est 3 originally printed at $113.4bn, +10.7% vs Est 3 a year ago.

Est 4 came in at $116.7bn, representing a downside surprise (our expectations was for around $120bn).

Est 4 is 2.5% above Est 4 a year ago.

So, on this basis, this represents a material downgrade on from 3 months earlier.

Recall that we have argued that the Est 3 on Est 3 headline figure of +10.7% was misleading. Such a reading – in our view – was too optimistic given the challenging backdrop. That’s notwithstanding the mining sector being at a turning point, with an emerging uptrend after six years of decline.

We assessed that the Est 3 on Est 3 figure was flattered by weak base effects (i.e. Est 3 a year ago was relatively weak compared with the final outcome for the 2018/19).

An alternative approach to interpreting the survey is to consider calculations based on applying average realisation ratios (RRs).

On our figuring, these RR calculations imply that nominal capex spending in 2019/20 will increase by about 0.5% on spending in 2018/19. This is also a downgrade on the survey three months earlier, with the figure then implying a rise of +2.5%.

By industry, Estimate 4 – based on avg RRs – implies that: mining capex will rise by around 11% in 2019/20; while services spending will fall by around 4%.

The mining picture is not greatly different from 3 months earlier (a rounding down from +13% to +11%). The picture for services is weaker that it was, with the estimate downgraded to -4% from -1%.

One point of clarification – the capex survey has its limitations. It excludes some sectors (education and health) and does not include some assets (spending on computer software and exploration). These sectors and assets are likely to record growth in 2019/20.