Q1 real capex: -1.7%, equipment -0.5% 2018/19 plans: Est 6 $122bn 2019/20 plans: Est 2 $99bn
- In Q1, capex spending disappointed, declining by 1.7%.
- Falls were evident across assets: building & structures, -2.8% and equipment, -0.5%. By industry, falls were broadly based: mining, -1.3%; services, -1.2%; and manufacturing, -7.4%.
- Estimate 6 of capex plans for 2018/19 is $122bn, which is 3.8% above Est 6 a year ago. This is broadly consistent with Est 5 of 3 months earlier.
- For the 2018/19 year, Est 6 implies capex spend will be 4% above that in 2017/18 ~ we calculate, based on average realisation ratios (RRs).
- Turning to 2019/20, Estimate 2 of capex plans is $99bn, which is 12.8% above Est 2 a year ago.
- This is a modest upgrade on Est 1 of 3 month ago (Est 1 on Est 1 was +11%). The main upgrade is a slightly less negative view on equipment – but it is still weak (in our view).
- We assess that the Est 2 on Est 2 figure of +12.8% is flattered by weak base effects. The Est 2 of a year ago was relatively weak compared with the likely outcome for the 2018/19 year.
- For the 2019/20 year, Est 2 implies capex spend will be 1.3% above that in 2018/19 ~ we calculate, based on average realisation ratios (RRs). This figuring suggests that the nearterm investment outlook is relatively subdued with a flat profile for the service sectors.
- By way of context, in the Federal Budget of April 2, the government forecast that business investment will rise by 5% in 2019/20.
- Est 2 for 2019/20 implies by industry, based on avg RRs: mining +6%; services +0.5%; manufacturing, -7%. By asset, based on avg RRs, Eest 2 implies: building & structures, +4%; and weakness in equipment, at -5%.
- We note that these calculations are sensitive to the choice of average realisation ratio. With that in mind, it may be better to describe the investment outlook as uncertain.
- For 2019/20, the capex survey suggests that: investment in the mining sector is set to turn the corner, advancing after a number of years of decline; and for the service sectors, investment in building & structures is likely to rise but spending on equipment is likely to fall.
- The timing of this survey, conducted in April and May, in the countdown to the May 18 Federal Election, was a period of heightened uncertainty. The next update may provide a clearer guide to the investment outlook.
Mining investment fell further early in 2019, with the wind-down of the investment boom now largely complete. Mining investment in the quarter is now 70% below the peak of mid-2012.
Investment by the service sectors expanded by 4.3% over the past year, despite a 1.2% dip in the March quarter. The uptrend is evident across both building & structures and equipment.
Looking to 2019/20, the investment outlook remains uncertain. We will be interested to see how investment plans are updated now that the Federal election is behind us. Uncertainty ahead of the election may have seen some firms reluctant to commit to new spending.
Estimate 2 of plans for the year is $99bn. This headline figure appears to be positive, being some 12.8% above Est 2 of a year ago.
However, we assess that this result is flattered by weak base effects. We estimate that Est 2 implies that capex spending in 2019/20 will be only 1.3% above the likely outcome for 2018/19. The weak spot is plans by the service sectors for equipment spending, which we calculate to be -5%. That contrasts with a near 3% rise for building & structures investment by the service sectors.
We see three key near-term trends in business investment.
Mining investment has likely turned the corner and will advance modestly in 2019/20, following many years of decline (post the earlier boom). Miners (notably for iron ore) are responding to higher commodity prices.
Non-mining investment in infrastructure is trending higher, with a focus on transport projects (a spill-over from the upswing in public investment) and a focus on renewable energy. This is largely locked-in. A key dynamic is the population boom of recent years. Both governments and businesses need to lift investment to meet the needs of this fast growing population.
Non-mining investment in equipment is likely to be relatively soft near-term given the weakening of consumer spending. By contrast, those commentators with a more upbeat take on the outlook would likely be looking for a lift in such spending.
