Kerrunch … that’s the sound of the country’s investment boom collapsing, as forecast by the Reserve Bank, successive Federal Governments and every economist worth their laptop and Twitter account.
The first estimate of private investment for 2015-16 will $109.7 billion (which is still a lot of money), 12.4% under the first estimate for the current financial year, but a huge 28% fall in the latest estimate for investment in the current financial year.
Even though the fall was expected, and has been forecast now for two years, – the size of the drop from the current actual estimate is stunning and underlines the speed at which the Reserve Bank moved to cut rates earlier this month, and why there seems to be at least one more cut ahead in the next few months, even next Tuesday at the bank’s March meeting.
The AMP’s chief economist, Dr Shane Oliver says the capex data "is consistent with further rate cuts from the Reserve Bank. When you put it together with record low wages growth, low inflation and an Aussie dollar which is still too high, the capex figures just reinforce the case for another interest rate cut."
"I have got one pencilled-in for next week. I don’t think we should rule out a fall in the cash rates into the ones (per cent).”
"What is lacking in the economy is investment and these figures are still fairly bleak. Mining is still declining at a rapid rate, non-mining investments are also declining at a rapid rate and there is a bit of light at the end of the tunnel for the rest of the economy, apart from manufacturing, but it’s still not enough to offset the mining decline.”
Dr Oliver wasn’t alone in his comments yesterday. JP Morgan Chief Economist, Stephen Walters wrote:
"The numbers look pretty bad. The estimate for 2015-16 was disappointing. It’s around $10 billion less than we were calling for. And it’s soft across the board. Mining is set to fall further, and manufacturing was revised down again.
"That’s not a surprise, but there’s not much sign of a revival in other sectors either. This lack of animal spirits is not what the RBA has been hoping for.
"It does add to the chance of a rate cut next week, though we think they will hold on to May. The survey was taken before this month’s easing and we haven’t seen what impact that has had on confidence,” he said.
A fall of $43 billion over the next year to 18 months equates to a drop of around $800 million a week in investment spending. That could take a big bite out of the economy, especially in its current sluggish state.
And the fact that there could be more falls to come because of the further cutbacks in spending in oil and gas could add to the pressures in growth and employment.
Certainly the value of construction work will continue to fall, while wage growth will be lucky to get out of its present rut of 0.6% for the December quarter and 2.5% for 2014 as a whole.
The first estimate a year ago for the current financial year was $124.4 billion, but that was quickly revised upwards in subsequent estimates, so that by the time the September quarter was released, the estimate was more than $153 billion, or nearly $30 billion more than that first estimate.
But there is a lot of doubt this time around there will be a repeat of those strong upward revisions in the 2014-15 estimates because the outlook for resources has weakened noticeably, especially for iron ore, coal, oil and LNG, all growth areas in previous estimates for investment.
According to the private capital spending data for the December quarter, released by The Australian Bureau of Statistics that first estimate is well under the latest estimate for the current financial year (called estimate 5) of $152.6 million. That fall of more than 28% can be explained by a number of companies ending, slowing or cutting their spending campaigns – such as BHP Billiton, Rio Tinto and Fortescue in iron ore, BHP in coal, Woodside, Santos, Exxon Mobil, Beach Energy, Origin, Chevron and others in LNG.
Many of the oil and gas companies have announced billions of dollars in further cuts to spending in the past six to seven weeks and they have yet to make an impact on the data. They will start showing up in the March quarter estimates to be released in late May.
The big driver for the fall was an expected 18.8% plunge in spending in 2015-16 by the mining sector (which includes oil and gas).
"Estimate 1 for Mining for 2015-16 is $60,233m. This is 18.8% lower than Estimate 1 for 2014-15. Buildings and structures is 20.4% lower and equipment, plant and machinery is 6.2% lower than the corresponding first estimates for 2014-15,” the ABS said in its release Thursday morning.
But the ABS also said spending by manufacturing companies will also be sharply lower in 2015-16 than 2014-15.
"Estimate 1 for Manufacturing for 2015-16 is $6,000m. This is 11.9% lower than Estimate 1 for 2014-15. Equipment, plant and machinery is 10.5% lower and buildings and structures is 15.2% lower than the corresponding first estimates for 2014-15.”
The slump in spending overshadowed the 2.2% fall in seasonally adjusted investment in the December quarter, with spending on buildings and structures down 2.6% in the quarter and spending on plant and machinery falling 1.3%. For the year to December, total investment fell 3.6%, while spending on buildings and structures slumped 7.3% , but rose 4.7% for plant and machinery.
The ABS said that Estimate 5 for 2014-15 is $152,656m, 8.6% lower than Estimate 5 for 2013-14 (the previous financial year). Estimate 5 is 0.4% higher than Estimate 4 for 2014-15, which was released late last November.
