Investment records biggest fall in 3½-years

 

New business investment in buildings or equipment fell by 4.7 per cent in the March – the weakest result in 3½-years and below forecasts for a +0.5 increase.

 Mining investment fell by 6.2 per cent while manufacturing spending fell by 0.8 per cent and spending by other industries fell by 2.9 per cent

•  The sixth estimate of investment for 2012/13 was $163.02 billion, down 2.9 per cent on the fifth estimate and below the usual (average) upgrade in the quarter of 1.0 per cent. Compared with a year earlier, the sixth estimate of investment was up 2.6 per cent on a year ago.
• The second estimate of investment for 2013/14 was $156.5 billion, up 2.6 per cent on the first estimate but below the usual upgrade of 6.1 per cent and down 9.8 per cent on a year ago.
• Dwelling approvals rose 9.1 per cent in April, after a 5.5 per cent fall in March. Approvals are up 27.3 per cent over the year.
• House approvals rose by 3.0 per cent in April (private sector up 2.5 per cent), while ‘lumpy’ apartment approvals rose by 18.7 per cent after falling by 8.9 per cent in March.

What does it all mean?

• The latest business investment data was certainly a mixed bag. Business spending was down in the March quarter, and while it was dominated by a large fall in mining investment, manufacturing and other industries also recorded weaker activity. Investment plans are still healthy but the cracks that appeared three months ago have started to widen and it is squarely focussed on the investment outlook.
• Usually investment plans lift by around 1 per cent at this time of the year. But the 2.9 per cent downgrade for FY2012/13 highlights the medium term risks to economic growth. Even the upgrade to the second estimate for FY2013/14 was well below decade averages. The resource boom is retracting and at the same time more businesses are re-assessing spending plans. The tough trading conditions and uncertain global environment have affected business confidence and as such businesses are pushing back investment projects until the outlook improves.
• The mining states pulled back sharply over the March quarter with Western Australia and Northern Territory recording the brunt of the weakness. The Reserve Bank certainly has some work on its hands to disentangle the various parts of the economy. The mining states are pulling back from heady levels of investment but the same can’t be said for non-mining states and industries – which have remained consistently weak.
• Manufacturing investment contracted for the sixth consecutive quarter. On a positive note the fall in the currency should alleviate some of the pressures on export orientated sectors like manufacturing. While the recent rate cuts and likelihood of further cuts should ensure that sectors such as residential housing start to gain some traction.
• At face value it is encouraging to see the lift in building approvals – especially given it is a forward looking indicator. However the sector is improving of a low base and the figures tend to be volatile, especially given the lumpiness of apartment approvals. Importantly the outlook for the sector is far brighter. Lower interest rates, strong population growth, healthy employment, and pent up housing demand is starting to see the housing sector shake of the shackles and begin a much needed resurgence.
• From the Reserve Bank’s point of view the lift in housing construction is a positive development. It leads to greater activity across depressed housing and retail sectors and increases housing supply in line with higher demand. CommSec expects the Reserve Bank to maintain an easing bias given the uncertain investment outlook and downside risks.

What do the figures show?
Private business investment

• Business investment (spending on buildings and equipment) fell by 4.7 per cent in the March quarter, below forecasts for a +0.5 increase. Spending on buildings fell by 5.5 per cent in the quarter while spending on equipment fell by 3.3 per cent. Investment is down 4.4 per cent over the year with buildings down 6.0 per cent and equipment down 1.6 per cent.
• Mining investment fell by 6.2 per cent while manufacturing spending fell by 0.8 per cent and spending by other industries fell by 2.9 per cent
• Investment fell in four of the eight states and territories in the March quarter. The biggest increase was in the South Australia (up 15.0 per cent), followed by the ACT (up 11.2 per cent), Queensland (up 5.9 per cent), and Tasmania (up 1.5 per cent). Spending fell most in the Western Australia (down 13.6 per cent) followed by Northern Territory (down 11.8 per cent), NSW (down 5.5 per cent), and Victoria (down 3.0 per cent).
• The overall deflator for investment goods was flat in the March quarter. The cost of buildings and structures rose by 0.2 per cent while the cost of equipment fell by 0.3 per cent.
• Over the year, the cost of investment goods rose by 0.2 per cent. The cost of buildings rose by 1.3 per cent while the cost of investment equipment fell by 1.6 per cent.
• The sixth estimate of investment for 2012/13 was $163.02 billion, down 2.9 per cent on the fifth estimate and below the usual (average) upgrade in the quarter of 1.0 per cent. Compared with a year earlier, the sixth estimate of investment was up 2.6 per cent on a year ago.
• The second estimate of investment for 2013/14 was $156.5 billion, up 2.6 per cent on the first estimate below the usual upgrade of 6.1 per cent and down 9.8 per cent on a year ago.

Building Approvals:

• Dwelling approvals rose by 9.1 per cent in April, after a 5.5 per cent in March. Approvals are up 27.3 per cent over the year.
• The current number of dwelling approvals (13,774) is above the decade average (13,417).
• House approvals rose by 3.0 per cent in April (private sector up 2.5 per cent). Meanwhile ‘lumpy’ apartment approvals rose by 18.7 per cent after falling by 8.9 per cent in March.
• House approvals are up 20.3 per cent over the past year while apartments are up 38.5 per cent.
• The value of all commercial and residential building approvals fell by 2.7 per cent in April after rising by 6.1 per cent in March. Residential approvals rose by 3.8 per cent with new building up 4.2 per cent and alterations & additions up 1.5 per cent. Commercial building fell by 10.3 per cent in April after rising by 25.2 per cent in March.

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 Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops.
• Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

What are the implications for interest rates and investors?

• Activity in the mining sector will remain firm for some time yet despite the recent pull back. No doubt the slowdown in China and lower commodity prices have weighed on investment decisions. But outside of the mining sector, businesses remain cautious and refuse to invest. The Reserve Bank may have more to do in cutting rates if future investment plans continue to be pared back.
• If global economies stabilise and consumers spending again then businesses may get their mojos back. Certainly businesses are cashed up and it is likely that commercial vacancy rates will fall in coming years due to the lack of building.
• The improvement in housing activity will be a huge multiplier across the economy – provided it is sustained. Lower interest rates will continue to be supportive to the sector.