Australia: CAPEX plans preview – Westpac

Andrew Hanlan, Senior Economist at Westpac, explains that the ABS survey of private business investment plans, the CAPEX survey, will provide some further guidance on Australia’s growth prospects.

Key Quotes

“The June quarter update will be released on August 31, including Estimate 3 of capex plans for 2017/18 and Estimate 7 for 2016/17 (the final outcome), as well as actual capex spending for Q2 2017.”

“The June quarter survey was conducted in July and August. This is at a time of improved business conditions globally and domestically, in part due to a reduced drag from the mining states. Business confidence has increased, mirroring global developments. Official data, having been mixed early in the year, in part due to weather disruptions, have generally been positive.”

“Capex trends are currently dominated by the deflating of the mining investment boom. The survey reported falls in the total value of capex spending in 2013/14, -1.6%; 2014/15, -4.8%; 2015/16, -15.3%; and in 2016/17, a likely -12%. A further decline in capex spend in 2017/18, centred on mining, is inevitable.”

“We anticipate the broadly 'neutral' outcome of around $96bn.”

“However, note, the headline number which will hit the screens, is the -9% (the Est 3 on Est 3 figure). This compares unfavourably with the -6.4% for Est 2 on Est 2. Markets may interpret this as being disappointing.”

“The "less weak" scenario is a stretch in our view. This would require an upgrade between Est 2 and Est 3 for 2017/18 of 17%, a particularly sharp revision by historical experience.”

“Our 'neutral' scenario for Est 3 of $96bn requires a 12% upgrade from the Est 2 of $85.4bn. This represents an above par lift, with 8.4% being the average of the past five years. We anticipate an above par upgrade this year given improved economic conditions, globally and domestically; resilience in global commodity prices; and the lift in business confidence.”

“However, a 12% upgrade would fall short of the 15.7% revision in 2016/17 between Est 2 and Est 3. That result was the largest upgrade for Est 3 since 2010/11 and before that since 2005/06. In 2016/17, Est 2 was constrained by the tumult that prevailed early in calendar 2016, when the iron ore price fell to only $40/t and China's sharemarket fell sharply. By the time of Est 3 for 2016/17, conditions had settled and commodity prices had rebounded, hence the sharp upgrade to capex plans.”