Yesterday’s data drop left more confusion in its wake than clarification about the health and direction of the economy.
And that suggests a stretch of weak GDP growth (and perhaps a surprise negative quarter or two over the next 18 months).
The big takeaway from the March quarter private investment data yesterday (which wasn’t very good for the GDP report next week), was that the forward projections for 2017-18 remain weak.
Retail sales yesterday showed a surprise 1% rise in seasonally adjusted terms in April, thanks to a 2.4% jump in sales in Queensland (but that was due to increased spending in Queensland in the wake of Cyclone Debbie). March’s flat growth report was revised downwards in the April report to a nasty fall of 0.2%).
In trend terms figures from the Australian Bureau of Statistics showed retail sales were up just 0.1%, as they were in March (remember trend terms smooth out the month to month volatility in the seasonally adjusted figures).
On Monday building approvals data for Aril were better than expected – a small rise after the revised fall of just over 10% (more than 13% in the initial report), a rise in other dwelling approvals, and signs that this volatile section of the report was stabilising around 8,000 – 8,300 for the past five months.
House prices fell 1.1% across the country in May, especially in Sydney and Melbourne, which isn’t bad news (despite some headlines). It is what the Reserve Bank and APRA want to see happening.
But the real worry was the investment intentions for the financial year starting July 1.
The ABS data shows that the single biggest area of private investment (and the only growth area) is what the ABS calls “Other Selected Industries. That will still be a long way behind dwelling investment, even thought that is declining.
Can you name one ‘other selected industry”? Try power, water and gas utilities as several. The group will see a nice 6% to 7% rise in planned investment to just over $50 billion in 2017-18.
But it also should be pointed out that the capex figures do not include hospitals, schools (private projects, the government spending should appear in next Tuesday’s highly confusing government finance data), software spending by all business (especially the banks and other big corporates).
The ABS figures show that second estimate for private investment in 2017-18 (which does understate the actual level of investment in the private sector because it has trouble measuring spending on software and other technology related items) hardly improved from the first estimate three months ago.
The ABS reported that Estimate 2 for total capital expenditure for 2017-18 was $85.436 billion – 6.4% lower than Estimate 2 for 2016-17 financial year. “the main contributor to the decrease is Mining (-21.7%),” the ABS said.
But compared the first estimate made three months ago, Estimate 2 was 5.2% higher with the main contributor to the increase was “Other Selected Industries (up 6.5%).”
Looking at estimate 2, while mining is down, there have been high hopes for more new manufacturing investment. That hasn’t happened for another quarter.
The ABS data shows that estimate 2 for Manufacturing for 2017-18 is $6.368 billion 0 12.4% than the second estimate for 2016-17. And worryingly, estimate 2 is 1.6% lower than Estimate 1 for 2017-18. “Buildings and structures is 8.7% higher and equipment, plant and machinery is 5.6% lower than the corresponding first estimates for 2017-18,“ the ABS said.
The lower machinery, plant and equipment spending is important because that flows into the GDP report and the data tells us there is no move by manufacturers to expand capacity.
There was better news for the category known as “Other Selected Industries" for 2017-18 is $50.541 million, which is now the biggest area of spending by private companies in the data.
The ABS said this is 6.2% higher than Estimate 2 for 2016-17 and 6.5% higher than Estimate 1 for 2017-18 given three months ago. “Buildings and structures was 5.4% higher and equipment, plant and machinery 7.6% higher than the corresponding first estimates for 2017-18. That is a big positive from the investment figures
Mining is a black spot. The ABS said that estimate 2 for Mining for 2016-17 is $36.015 billion. "This is 32.1% lower than Estimate 2 for 2015-16. Estimate 2 is 5.5% higher than Estimate 1 for 2016-17. Buildings and structures is 7.2% higher and equipment, plant and machinery is 2.4% lower than the corresponding first estimates for 2016-17,“ the ABS said.
Mining investment will end up around $56 billion in 2016-17, according to yesterday’s report. The second estimate is 40% below that.
But the AMP’s Chief Economist, Dr Shane Oliver says there is a small glimmer of good news in that because it shows the slide in mining and resource investment is close to ending. But he said “Manufacturing capex plans look disastrous in FY18.”
"We would caution that there have only been two estimates for FY18 capex spending which normally tend to be revised up as the financial year actually gets underway and firms have a better outlook around spending plans. Nevertheless ,the ongoing weakness in non-mining investment at a time of continued weakness in the mining sector is a concern for the growth outlook
“The forward-looking capex data indicates that the outlook for business investment is still challenging in Australia and along with weak consumer spending and slowing housing construction will keep GDP growth subdued and below trend,” Dr Oliver wrote yesterday in a note.
“The slowdown in house price growth will be welcomed by the RBA but we think another rate cut is unlikely right now, because the headline unemployment rate is low-ish, employment growth is good and business surveys still look strong.
"However, while our base case is for the RBA to remain on hold this year, the combination of weaker growth and inflation than it expects and the slowing now evident in the Sydney and Melbourne property markets means that the probability of another rate hike is steadily rising. The money market’s implied probability of a 20% chance of a rate cut by year end is still too low – it should probably be around 45%,” Dr Oliver said.
