Biggest fall in business investment in 5½ years

Business investment

• Softer investment: New business spending on buildings or equipment fell by 4.4 per cent in the March quarter – the biggest fall since September quarter 2009.
• Expected business investment in 2014/15 is $149.9 billion, down 8.1 per cent on a year ago. Expected business investment in 2015/16 is 104 billion down 24.6 per cent on a year ago.
• Non-mining spending: Investment outside the mining sector hit $71.4 billion in the year to March 2015, the highest result since the year to June 2012. Services investment hit a record $63 billion over the past year.

What does it all mean?

•  There wasn’t a lot of good news in the business investment report. Spending is down, expectations of future investment are down and there were downward revisions to previous quarter results.
• The main good news is that the data is old – almost ancient history. Rates have been cut in early May and the budget cut taxes for small businesses as well as providing taxation provisions for writing off spending on new assets up to $20,000.
• The Reserve Bank won’t panic, but the latest data keeps an easing bias in place for monetary policy.
• Some good news was contained in the data that services investment was at record highs and non-mining investment in the year to March was at 2½ year highs. The other good news is that investment in South Australia was at record highs over the past year.

What do the figures show?

 Private business investment

• Overall: Business investment (spending on buildings and equipment) fell by 4.4 per cent in the March quarter after falling by 1.7 per cent in the December quarter. Spending on buildings fell by 6.5 per cent in the quarter while spending on equipment fell by just 0.5 per cent. Investment is down 5.3 per cent over the year with buildings down by 9.5 per cent while equipment is up by 3.5 per cent.
•  Sectors: Mining investment fell by 4.1 per cent in the March quarter (sixth straight decline), while manufacturing spending fell by 9.4 per cent and spending by “other selected industries” fell by 4.2 per cent.
• States: In seasonally adjusted terms investment fell in five of the eight states and territories in the March quarter. The biggest rise was in Victoria (up 1.4 per cent), followed by Western Australia (up 1.1 per cent) and Tasmania (up 0.5 per cent). Investment fell most in Queensland (down 14.9 per cent) from South Australia (down 14.7 per cent), Northern Territory (down 14.1 per cent), ACT (down 10.9 per cent) and NSW (down 6.1 per cent)
• Despite the fall in the quarter, investment in South Australia hit record highs in the year to March.
• Prices: The overall deflator for investment goods was up 0.4 per cent in the March quarter after a flat result in the December quarter. The cost of buildings and structures rose by 0.1 per cent while the cost of equipment rose by 1.1 per cent. Over the year, the cost of investment goods rose by 0.8 per cent – the slowest rate in almost two years. The cost of buildings rose by 1.4 per cent while the cost of investment equipment fell by 0.5 per cent over the year to March.
• Forecasts: The sixth estimate for investment in 2014/15 is $149.946 billion, down 8.1 per cent on the sixth estimate for investment made for the previous (2013/14) financial year. And the investment expectation is down 0.6 per cent on the fifth estimate made for the current 2014/15 financial year. The second estimate of investment in 2015/16 is $104 billion. This is 24.6 per cent lower than the second estimate for 2014/15.
• Revisions: The ABS notes downward revisions to earlier forecasts:
• “The December quarter estimate for expected expenditure in 2015-16, Estimate 1, has been revised downwards by $7,228m (-6.6 per cent). Buildings and structures was revised downwards by $6,788m (-8.9 per cent) and equipment, plant and machinery was revised downwards by $440m (-1.3 per cent). The December quarter estimate of short term expectation for total capital expenditure in the six months ending 30th June 2015 was revised downwards by $2,196m (-3.0 per cent) and the estimate for actual total capital expenditure for the December quarter 2014 was revised upwards by $338m (+0.8 per cent) in original, current price terms.”

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

What are the implications for interest rates and investors?

•  The Reserve Bank will retain its easing bias – bias to cut rates. Much depends on the response to the last rate cut and the budget’s small business measures.
• The mining investment boom has ended but it is no crash. Investment almost doubled in five years and is now just 9 per cent off the peak.