Preview of the Australian Q3 Private Capital Expenditure (capex) report due on 27 November 2014

Coming up at 0030GMT.

  • The ‘headline’ figure is expected to be -1.9% from +1.1% in Q2. The “equipment, plant and machinery” component of this total feeds into next week’s GDP business investment figures so that component might influence market reaction. But the total initially will garner most of the initial headlines.
  • The “equipment, plant and machinery” component is expected at -1.0% ,, the Q2 reading was -0.9%
  • The other key data point from this report is the capital spending expectations for financial year 2014/15. This is Estimate 4 for 2014/15
  • In the Q2 release we got the 3rd estimate for 2014/15, which came in at $145bn (a bump up from the prior estimate at $137bn).
  • Note that at $145bn, the 3rd estimate for 2014/15 was about 10% below the 3rd estimate for 2013/14. This reflects the slowdown in mining investment.

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Here is a little background on the important role capital expenditure plays in the Australian economy (background via NAB & other sources):

  • More than most other rich countries capital expenditure is a huge part of the Australian economy
  • For the past fifty years new capital expenditure has run at around 25-30% of GDP in Australia compared to around 20-25% of GDP in the United States
  • The historically large amount of Capex in Australia reflects the abundant economic opportunities which in turn are the result of a rapidly growing population (the population grew 1.7% in 2013) and a vast geography with under-developed resources
  • The most recent peak for Capex was near 29% of GDP in Q4 2012, as investment in the mining/resource sector peaked
  • Since then, mining investment has slumped and total capital expenditures have been falling in real terms
  • The challenge for the Australian economy is for something to fill the gap left by the downturn in the resource sector Capex
  • Residential construction is helping, as is public sector infrastructure
  • But the RBA have been hopeful of a recovery in Capex by non-mining firms. In his speech last week Governor Stevens was a bit more hopeful saying “After several years of quite subdued growth, we estimate that non-mining activity has picked up some speed over the past year.”
  • Forward indicators do suggest a modest recovery in non-mining Capex will continue. This is why the Governor added in his speech last week that “it would be good to see some further strength here, as the decline in mining investment activity continues. There are sufficient spare labour resources such that we could probably enjoy a couple of years of non-mining sector growth somewhat above its trend rate before we needed to worry too much about serious inflation pressure”. It’s fair to read this as implying: 1) overall growth remains subdued; 2) there are few/no inflation pressures to be concerned about over the next “couple of years”; and 3) accordingly there are few upside pressures on interest rates in the near term.