Fall in business investment points to slowing GDP, but prospects look brighter


November 29, 2018 16:42:39

On the evidence so far, Australia’s economy looks to have slowed over the September quarter, with disappointing capital expenditure and construction data releases ahead of next week’s national accounts.

Key points:

  • Sharp declines in building investment, particularly in mining, dragged down Q3 capital expenditure
  • Investment intentions were up 5pc, the biggest upgrade in almost 20 years
  • Weak capex and construction data may lead to slower than expected GDP growth in Q3

Capex spending fell by 0.5 per cent over the quarter, compared with market expectations of a solid 1 per cent lift.

Yesterday’s ‘construction work done’ data from the Australian Bureau of Statistics was also much weaker than expected, down almost 3 per cent over the quarter compared with the 1 per cent rise most economists had factored into their spread sheets.

Both sets of data are important building blocks — or partials — for the make up of GDP growth in next week’s National Accounts release.

However, the figures may not be so bleak as a first glance suggests.

For a start, there an upward revision to second quarter investment data, although it still down 0.9 per cent.

A sharp 2.8 per cent fall in spending on building and structures was largely responsible for the ‘soft’ capex result and not unexpected after the construction data.

However, there was more positive news elsewhere.

Equipment, plant and machinery spending rose more than 2 per cent over the quarter.

Investment in manufacturing was up 2.7 per cent over the quarter, while the miners tightened their purse strings with spending down 2.7 per cent.

Spending plans stronger

Importantly, investment intensions were stronger than expected.

Businesses revised up their spending intentions for the 2018/19 financial year to $114 billion, up from the previous estimate of $102 billion.

It is the biggest upgrade in investment intentions in almost two decades.

BIS Oxford Economics chief economist Sarah Hunter said while the headline number was disappointing, a closer look suggested that it wasn’t all bad.

“The mining sector was responsible for the decline in total spending, with the ongoing completion of the LNG projects pulling down building and structures spending, but plant and equipment expenditure rose 7.4 per cent over the quarter, suggesting that other parts of the sector are now looking to replace worn-out capital and expand production,” Ms Hunter said.

“The survey data confirms the information from the business confidence indicators — firms remain optimistic about the outlook, are increasingly hitting capacity constraints, and are planning to invest to expand capacity.

“We continue to expect non-mining business investment to be a driver of growth over the next one to two years.”

‘Downside risk’ to GDP

UBS economist George Tharenou said while the ‘intentions’ survey improves the outlook, the backward looking data posed a ‘downside’ risk to GDP forecasts.

“Overall, Q3 capex surprisingly fell, after softer than expected construction and retail,” Mr Tharenou said.

“For real GDP there is still significant uncertainty ahead of inventories, trade, public and overall consumption all due next week.”

For the time being, Mr Tharenou is maintaining his forecast of GDP growth of 0.6 per cent over the quarter and 3.3 per cent for the past 12 months.

“Better than expected private and public investment — along with larger than expected fiscal stimulus — could be an upside risk to our outlook, that said we still see downside risk to consumption from tighter credit and weaker housing,” he said.







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