Finally some good news for the economy after the gloom on falling house prices, weak household spending and the sharp fall in the value of construction spending in the final quarter of 2018.
Figures out yesterday confirmed not only are Australian companies spending more on investment, but the outlook is the strongest for three years.
According to the Australian Bureau of Statistics (ABS), private sector capital expenditure (Capex) rose by 2%, seasonally adjusted, to $30.1 billion, in the December quarter topping forecasts for a smaller increase of 1%.
Investment had previously fallen in each of the prior three quarters of 2018. From a year earlier, Capex rose by 1.9%, driven by strong investment in plant and equipment.
Estimate five for the current 2018-19 financial year was revised higher to $118.4 billion, 4% more than the prior estimate and 3.6% higher than the fourth estimate for the 2017/18 financial year – another positive for the Reserve Bank ahead of its March board meeting next Tuesday and interest rate decision.
And more importantly the rebound in business investment that emerged two years ago, is continuing with the first estimate for Capex in 2019-20 coming in at $92.1 billion, up from market estimates of $90.5 billion and an upbeat 11% ahead of the first estimate a year ago for the 2018-19 financial year (that’s the current year).
That first estimate for 2018-19 was up 3.5% from the previous first estimate so the early spending plans are well above levels seen for some time.
The figures out yesterday in the 5th estimate for 2018-19 confirm that the mining boom is finally petering out, but is slowly being replaced with more spending by mining companies looking to extend existing operations, a trend that will become more apparent in the next 18 months.
In fact, mining boosted expected investment spending in 2019-20 by 21.4% to $30.2 billion from a year ago in the first estimate, a sign that the mining boom hasn’t gone away and like the Norwegian parrot of Monty Python fame has been ‘resting’.
The ABS private capex data underestimates the totality of business investment – it only captures around 60% of total business investment, excluding spending from industries such as agriculture, health and education and on products such as software.
That is a significant omission given that health services have been a major area of employment growth in the current jobs boom and hospitals, medical clinics and other facilities are not fully captured. They are in the government investment data (out next Tuesday).
But more and more spending in this area is coming from the private sector where interest is high, as we have seen with the takeover battle for Healthscope, the country’s second-biggest private hospitals operator.
Within yesterday’s total spend, investment in buildings and structures rose by 3.2% to $16.1 billion. Despite the quarterly increase, investment in this category was down 2.9% from a year earlier.
Investment on equipment, plant, and machinery rose by a smaller 0.7% to $14 billion, leaving it up an impressive 8.1% from the same quarter a year ago.
This category flows through directly into each quarter’s GDP figures, meaning a nice boost in next Wednesday’s release of the December quarter national accounts. But the contribution will only be small, meaning the risks to GDP remain on the downside ahead of Monday’s wages salaries and stocks figures and Tuesday’s current account and government finance data.
By industry, all of the strength during the quarter came from the category known as other selected industries, predominantly services which account for around 70% of activity in the economy.
Investment in this category jumped by 5.6% to $19.8 billion, up 9.1% from a year earlier.
In contrast, investment at mining and manufacturing firms slumped by 4.3% and 4.4% respectively to $7.9 billion and $2.35 billion. The quarterly total for mining was the lowest since the September quarter 2007, reflecting the end of the mining boom.
From a year earlier, investment at mining and manufacturers fell by 11.5% and 2.1% respectively.
The stronger investment spending is probably why the monthly financial data from the Reserve Bank continues to show solid growth in business lending, while lending for housing continues to fall (because of weak demand from investors, and lately owner occupiers).
For businesses, credit grew by 0.3% in January according to the RBA data, pushing the annual rate to 5.2%, the fastest since the end of 2016.
The result is consistent with the strong lift in business investment recorded in the final three months of last year, along with expectations for increased investment in the next financial year.
