Australia: Uplift in business investment is cause for optimism - Westpac

Elliot Clarke, Research Analyst at Westpac, explains that market participants and the RBA have long been waiting for an uplift in business investment and in the latest CAPEX release, there is cause for optimism (albeit measured).

Key Quotes

“While the quarterly outcome which feeds into GDP disappointed, this came as a result of a late-cycle bout of weakness in mining investment, as key gas projects draw near completion. More importantly for the outlook was the 1.8%, 10.4%yr gain for CAPEX across the non-mining economy. This upswing is being driven by construction work, particularly non-residential activity to meet the needs of a growing population. Victoria is the most notable beneficiary by state.”

“Estimate 5 for investment in the current financial year implies a 2.5% gain on the 2016/17 year, as non-mining investment offsets the dissipating drag from mining. The first estimate for the 2018/19 financial year suggests this uptrend will continue, with a 3.5% gain overall and a 8.0% rise for non-mining spending expected. The mix remains skewed to buildings and structures (13.5%) over equipment (2.0%). Note that early estimates for the coming financial year are highly volatile. Further, the CAPEX survey is only a partial representation of business investment; that said, to the extent that it omits key growth industries, the estimates are more likely to be skewed to the downside than upside.”

“A consequence of the above CAPEX disappointment in the December quarter (and last week’s construction release) is that we have shaved our Q4 GDP forecast for next week by 0.1ppt to 0.5%, 2.5%yr. Of the contributors to the overall forecast, the positives include: a modest bounce for consumption 0.7%, 2.1%yr; a 1.5%, 7.0%yr gain for business investment; and a gain for public spending of 0.6%, 4.4%yr. Net exports will however subtract 0.6ppts in the quarter. Looking to 2018, the sub-trend pace of expansion is set to persist as the consumer is restrained by weak wages, and the home building downturn continues.”

“Important to both of these factors, house price growth remained in a downtrend in February. The national composite has fallen 1.3% since October, led by declines in Sydney. Here, annual price growth turned negative for the first time since late 2012, –0.5%yr. In Melbourne, annual price growth has instead held up, 6.9%yr in February. Recent data on auction clearance rates point towards a stabilisation in prices in the months ahead. For an in-depth assessment of Australian housing markets, see our latest Housing Pulse report.”