- Mining capex looks set to plateau at close to 8% of GDP in 2013/14. The real drag on GDP growth from falling mining capex looks to be some time away.
- The non‑mining investment outlook looks stronger than that reported in the previous capex survey three months ago.
- The ABS capex survey underestimates non‑mining capex. Other forward‑looking indicators of non‑mining capex are supportive of a recovery in the sector.
- Actual capital spending rose by 3.6% in QIII from a downwardly revised 1.6% lift in the previous quarter.
The positive QIII outcome for actual business capex bettered market expectations which centred on a fall of 1.2%. The 3.6% rise in capex over the quarter was broad‑based. Mining capex was up 4.0% while non‑mining investment grew by 3.0%. The data shows that mining investment is hovering around its peak, while there are tentative signs that the desired lift in non‑mining investment is beginning to occur. Despite picking up, manufacturing investment is weak as the prolonged effects of a strong domestic currency continue to bite.
The fourth estimate of 2013/14 capex expectations was the market focus from today’s data. Companies upgraded their expectations for capex spending in 2013/14. The outcome makes us confident of how the transition from mining to non‑mining led growth will proceed. Based on today’s numbers, the investment outlook looks a little stronger than that reported three months ago. Nominal total capex looks like it will rise by around 1% in 2013/14. This compares to the capex survey published three months ago which indicated that capex would fall in 2013/14.
Today’s data does not change our view on the mining investment story. The fourth estimate of mining capex plans for 2013/14 came in a little better than we were expecting. Mining investment was just under 8% of GDP in 2012/13 and we remain comfortable with our long‑held view that mining capex will plateau at a similar amount in 2013/14. The real drag on GDP growth from falling mining capex looks to be some time away. By this time, growth in the non‑mining economy is expected to have picked up noticeably. The resilience in mining capex expectations indicates that the period of large project cancellations looks to have largely finished. In our view, the mining outlook is stronger than that indicated by the RBA in its latest Statement on Monetary Policy. The RBA downgraded their 2014/15 growth forecasts based on an expectation that mining investment will fall more than previously anticipated.
The more pressing concern at the moment is how the non‑mining story will play out. Non‑mining capex expectations for 2013/14 were the stronger part of the story today. Non‑mining capex now looks like it will grow marginally in 2013/14. The previous estimate indicated a 5% fall in non‑mining capex over 2013/14. Timing is important when analysing the capex survey. The latest capex survey was taken over October‑November. During this time, business confidence rebounded noticeably. The Aussie dollar appreciated in October and then fell, now trading at just over USD0.91. Most commentators expect the Aussie dollar to move lower so it is likely that companies saw the appreciation in the currency as temporary.
We have pointed out for some time that the ABS capex survey has some limitations when assessing the outlook for non‑mining capex. The capex survey excludes some large non‑mining sectors including agriculture, health care & social assistance and education & training. Capital spending in these excluded industries has been robust.
We have analysed the pipeline of non‑mining work based on data from the Deloitte Access Economics Investment Monitor. Based on this data, we have calculated that the total value of definite non‑mining capex projects that exists in the pipeline is $138bn. This equates to just over half of the total value of definite mining projects at the moment. This is a significant pipeline of non‑mining work that exists and should provide a significant offset to the looming “pothole” left by the end of the mining construction boom. The first indicators of higher spending activity in the non‑mining sector will be through lending data. Current levels of commercial finance are turning up which has historically been a good indicator of non‑mining investment activity.
Today’s figures do not alter our thinking on the outlook for interest rates. Any further rate cuts run the risk of overstimulating the housing market without gaining the desired “rebalancing” of growth. The RBA’s preference is for further stimulus to come via a lower Aussie dollar. We believe that the RBA is a reluctant rate cutter and continue to see the current 2.5% cash rate as the low point in the current cycle. We expect the RBA to remain on hold at next week’s Board meeting.
