Australian CAPEX plans: a preview Est 4 for 2017/18 - Westpac

Andrew Hanlan, Research Analyst at Westpac, explains that the ABS survey of private business investment plans, the CAPEX survey, will provide some further guidance on Australian growth prospects and the September quarter update will be released on November 30, including the 4th estimate of capex plans for 2017/18, as well as actual capex spending for Q3 2017. 

Key Quotes

“Here we provide scenarios for Estimate 4 of 2017/18 plans. Historically, capex plans begin to become more reliable when the outcome for the preceding year is known, that is from Est 3 on.”

“The September quarter survey was conducted in October and November. Private business surveys report that business conditions are elevated and business confidence is a little above average, broadly as was the case three months earlier. However, the expansion is uneven, with weakness centred on consumer spending. The household sector remains under pressure with persistent weak wages growth (despite recent higher commodity prices boosting national income) and high debt levels.”

“Business investment spending, as measured by the capex survey, will likely be a little lower in 2017/18 than in 2016/17, reflecting the final stages of the mining investment wind-down.”

“However, the national accounts will, in time, likely show business investment in 2017/18 is a little greater than in 2016/17. The capex survey excludes some areas of strength (health, education and agriculture, as well as computer software spending) and as such overstates the importance of mining.”

“Scenarios: Est 4 for 2017/18

Scenario 1: "broadly neutral" - in our view

Est 4 of $104bn, -3% vs Est 4 a year ago

(in line with the -3.6% for Est 3 on Est3)

Applying avg RRs* implies a -4% for 2017/18,

(broadly in line with the -3% implied by Est 3)

Scenario 2: "softer" 

Est 4 of $99bn, -7% vs Est 4 a year ago

Scenario 3: "less weak"

Est 4 of $109bn, +2% vs Est 4 a year ago”

“We anticipate the broadly 'neutral' outcome of around $104bn.
The headline number which will hit the screens, is the -3% (the Est 4 on Est 4 figure), which is in line with the -3.6% for Est 3 on Est 3.

* Note, avg RR calculations are sensitive to the industry split.”

“Upgrade Est 3 to Est 4

• The scale of the upgrade between Est 3 and Est 4 varies year to year reflecting shifts in economic conditions and confidence. It also reflects shifts in the mix in capex spending across industries and assets.
• Our 'neutral' scenario for Est 4 of $104bn requires around a 3% upgrade from the Est 3 of $101.8bn. This represents a relatively typical upgrade, being in line with the average for the previous four years, but a step up from the 1.5% upgrade in 2016/17”

“Comments

• Developments in business investment have been more favourable of late, which is welcome news for policymakers.
• For the June quarter 2017, the national accounts report that total business investment grew by 1.1%, following a 2.2% increase in March and a rise of 1.4% in December. Over the year, investment increased by 1.5% a sharp turnaround from a 10.3% fall over the previous year, and the first positive result for annual growth since the start of 2013. Notably, there is a greatly diminished drag from the mining investment wind-down and the non-mining sectors are growing their workforce and expanding their investment.
• Private non-residential building activity is set to move higher (see charts overleaf). Approvals for the 12 months to September are 18% above a year ago and 30% above the start of 2016. Notably, more office projects are proceeding, particularly in Victoria, which has experienced sustained strength in population growth and jobs growth.
• The June quarter capex survey of three months ago was a positive update, adding to the evidence that non-mining investment is on the rise. Capex plans for the services sectors were upgraded to +10%, revised up from +6%.
• However, the non-mining investment recovery to date is uneven. Strength is in construction, as evident in capex plans. Est 3 on Est 3 for services is +22.5% for building & structures but is -2% for equipment. The upbeat building & structures plans are consistent with the lift in building approvals, as well as the uptrend in infrastructure activity (centred on telecommunications and power generation). However, weak equipment spending plans is a concern and, in our view, is a reflection of lacklustre consumer spending.”