Business investment soared in the September quarter. New business investment in buildings or equipment rose by 12.3 per cent in the September quarter – the biggest quarterly gain in 15 years.
- Mining spending rose by 22.1 per cent with manufacturing investment up by 9.8 per cent while “other” investment rose by 4.1 per cent.
- Investment plans remain solid: Australian companies expect to spend $158 billion in 2011/12, up 26.9 per cent on the expectation made the same time last year for the 2010/11 year.
- Investment spending rose in six of the state/territory economies led by Tasmania and Western Australia.
What does it all mean?
There’s no doubt about it – investment is going gangbusters. Cashed-up Aussie companies are putting their money to work by buying or building new premises and upgrading or adding to machinery, computers and other equipment. And the positive element is that spending is being spread across industries and states and territories, to some extent watering down the theory of a “two-speed” economy.
Certainly there are good reasons to be investing. Companies are cashed up, the cost of new equipment has been falling in line with the strong dollar and demand for Australian resources remains strong across Asia.
From the Reserve Bank’s point of view, the hope is that the new investment will spur productivity growth, thus keeping price pressures at bay. And there are no inflationary flashpoints in the investment data with the overall cost of investment falling in annual terms for the past two years.
The question is whether the focus on new equipment investment will result in companies becoming less inclined to hire new staff, preferring instead to adopt more capital intensive production processes.
The latest investment data suggests that the Reserve Bank will remain on the interest rate sidelines at the December Board meeting. Clearly rates could still be cut if a new front opened in the European Debt Crisis, but the firm result in business spending and business investment plans indicates that the economy has momentum heading into 2012.
What do the figures show?
- Business investment (spending on buildings and equipment) rose by 12.3 per cent in the September quarter – the biggest gain since June quarter 1996. Spending is up a record 31.1 per cent on a year ago.
- Spending on buildings rose by 17.1 per cent in the quarter – the biggest rise in 4½ years.
- Spending on equipment rose by 6.3 per cent – the biggest gain in nine months. Investment in buildings and structures stands 39.5 per cent higher than a year ago while equipment investment was up by 21.1 per cent.
- Spending in the mining sector rose by 22.1 per cent in the September quarter after an 18.3 per cent rise in the June quarter. Spending in manufacturing rose by 9.8 per cent while investment in “other selected industries” rose by 4.1 per cent.
- Investment rose in six of the eight states and territories in the September quarter. The biggest increase was in Tasmania (up 19.2 per cent), followed by Western Australia (up 16.6 per cent), Queensland (up 10.5 per cent), NSW (up 9.7 per cent), Victoria (up 6.3 per cent) and ACT (up 0.5 per cent). Spending fell most in the Northern Territory (down 6.5 per cent) followed by South Australia (down 0.9 per cent).
- The overall deflator for investment goods rose just 0.1 per cent in the September quarter – only the first increase in a year. The cost of buildings and structures rose by 0.2 per cent in the quarter while the cost of equipment fell by 0.7 per cent.
- Over the year, the cost of investment goods fell by 1.6 per cent. The cost of buildings rose by 1.3 per cent over the year, while the cost of investment equipment fell by 6.1 per cent.
- The fourth estimate of investment for 2011/12 was $158.0 billion, up 5.1 per cent on the third estimate and up 26.9 per cent on the estimate made in the September quarter last year for the 2010/11 year.
What is the importance of the economic data?
“Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.
The data on actual spending is broken-down at a state and industry level and estimates are represented in nominal and price-adjusted (volume) terms. The data on expected spending contains a mix of short and longer-term estimates. The short-term estimates may focus on periods just three months ahead while the longer-term estimates may look as far as 18 months into the future.
What are the implications for interest rates and investors?
The strong investment result and continued lift in investment plans is clearly encouraging. And it further cements Australia as having the strongest advanced economy in the world.
The solid lift in investment spending is good news for construction and engineering companies as well as mining services companies.
The strength of the latest investment data gives the Reserve Bank time before deciding the next move on interest rates. Provided the European Debt Crisis doesn’t worsen over the next week, the Reserve Bank can stay on the interest rate sidelines until 2012. We still expect at least one more rate cut in the current cycle.