Capex spend down in Q4, -2.8% (but equipment up by 0.8%). Est 1 for 2020/21 is positive, centred on mining.
December quarter
- Capex spending fell in Q4, -2.8%, a downside surprise (market median +0.5% & Westpac -0.2%).
- Building & structures was the source of weakness, down sharply, -5.9%. By way of context, the Construction Work survey, which we factor into our GDP calculations, was a -3.8%.
- Equipment spending advanced in Q4, rising by +0.8%. That exceeded our forecast, a -0.5%. It represented only a partial rebound from a 3.6% fall in Q3.
- By industry: mining, -2.7%qtr, +0.9%yr; and services, -1.9%qtr, -8.6%yr; while manufacturing was -10.1%qtr, -5.4%yr.
- Mining capex appears to be stabilising, representing a turning point – with an emerging uptrend after 6 years of decline. The uptrend in services capex has faltered, with spending falling away in 2019 at a time of weak demand.
December quarter GDP forecast
- Our forecast for Q4 GDP remains 0.5%qtr, 2.1%yr.
- The arithmetic is: domestic demand, +0.1%; inventories, +0.1ppt; and net exports, +0.2ppts; as well as the statistical discrepancy at +0.05ppt (i.e. the risks to the forecast are tilted a little to the downside).
- A GDP preview will be published tomorrow.
2019/20 capex plans
- Est 5 is $120.3bn, 2.1% above Est 5 a year ago.
- By comparison, Est 4 was $116.7bn, 2.5% above Est 4 a year ago.
- We estimate – based on average realisation ratio (RR) calculations – that Est 5 implies capex spending in 2019/20 will be about 1% above that in 2018/19.
- By industry, capex spending is mixed, up on mining (+11% we calculate) but down on services (around -3% we calculate).
2020/21 capex plans
Est 1 is $100.2bn, 8.8% above Est 1 a year earlier.
By industry, the figures for Est 1 on Est 1 are: mining, +28%; and services, -1.6%.
Based on average realisation ratios, we calculate that Est 1 implies: total capex in 2020/21 will be 7.7% above that in 2019/20; mining will be up by around 21%; and services will be up by a modest 2.4%.
This initial reading on capex for 2020/21 is stronger than we anticipated. The reading on mining is particularly strong. No doubt, there is an emerging uptrend, but we are still surprised by the extent of the planned lift in mining capex – implying a rise in dollar terms of around $8bn.
On services, the reading appears to be relatively neutral, a small positive. We see the risk that spending ultimately proves to be more subdued than that due to the patchy and uncertain demand backdrop.
Lastly, we add a couple of words of caution. Estimate 1 for a given year can be an unreliable guide to actual spending. Also, it is too soon for firms to have adjusted their investment plans in response to the coronavirus – any impacts may be more apparent in the next update, in late May.
