• The 4th estimate of 2015‑16 capital spending came in at $120.4bn, slightly better than expected. Mining plans came in at $56b and non‑mining plans are now at $64bn.
• However, business investment will still remain a drag on the economy over the next financial year.
• Capex fell by 9.2% in QIII, to be 20% lower over the past year. Mining fell 10.4% and non‑mining by 8.2%.

There was nothing in last week’s data that indicates a need for the RBA to cut the cash rate in the near‑term.
The overall reading from the QIII capital expenditure survey was mixed. The expectations component looks slightly better compared to three months ago, but still paints a picture of weak business investment in Australia for the next year. Actual QIII capex came in below expectations which will mean that QIII GDP forecasts will probably be revised lower.

2015/16 Expectations

There are always a few moving parts in the capital expenditure release which can make its interpretation difficult. Every quarter, firms who are surveyed give an estimate to their expectations for capital expenditure spending for the current or following financial year (or both). However, spending expectations adjust higher and lower over the course of the year, as macroeconomic conditions vary and firm‑specific factors change. Over the course of each quarter, there are some “normal” trends that we can observe. This allows us to transform spending expectations into expected realised spending across the financial years.

The key component in today’s data is the 4th estimate of 2015‑16 spending. In headline terms, the fourth estimate of total capital expenditure spending came in at $120.4bn. This estimate is 4% higher on the 3rd estimate. After making the necessary adjustments, realised total capital expenditure in 2015/16 looks like it will fall by 24% over the year. This outcome looks a little stronger compared to three months ago, but only slightly so.

The breakdown across the components shows that mining and non‑mining capex plans were both upgraded marginally. Mining capex still looks like it will fall by ~35‑40% in 2015/16. Non‑mining capex looks like it will decline by ~10% over the period. These types of projections are in line with the RBA’s most recent forecasts. There is also a large “confidence interval” in these estimates because of the issues in using realisation ratios. Using historical realisation ratios shows that non‑mining capex could change anywhere between +19% to ‑19% in 2015/16.

QIII Capex results

QIII private capital expenditure fell by 9.5%, slightly worse than market expectations which centred on a fall of 2.9% {CBA(f) ‑6%}. The annual fall in capex is 20%, with mining down 29.6% over the year and non‑mining down 9%pa. The fall in non‑mining capex in annual terms indicates that there could be some further downside risk for business investment over 2015/16. There may also be some downside risk for next week’s QIII GDP numbers.

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• The goods and services trade deficit came in at $2.3bn in September. Total exports rose by 3.4% and total imports rose by 1.7%.
• A recovery in iron ore prices lifted export receipts over September. The start of new LNG plant production means further upside to resource volume exports.
• The tourism balance continues to improve and is tracking in line with changes in the Aussie dollar.

The September goods and services trade deficit came in below market expectations ( $‑2.9bn vs CBA (f): $‑3.2bn). The ABS has made some notable revisions to history which has made trade deficits over recent months look smaller. Australia has been running a goods and services trade deficit for 2015. But, the trend over recent months has been towards smaller deficits.

Goods exports rose by 4.1% over September, the largest monthly increase since early 2014. A 7.9% surge in iron ore exports drove the outcome thanks to a pick‑up in iron ore prices. Iron ore export volumes also remain at high levels. Metal exports (excluding gold) also recorded a 31% lift over September (but from a lower base). Rural exports were 1.1% higher over September.

New LNG shipments will lift resource export volumes over coming months. In October, Gladstone LNG began exporting and will show up in the trade numbers over the next few months.

On the import side, consumption goods rose by 3.2% in September driven by a large increase in non‑industrial transport equipment. Capital goods imports rose by 2.2% while intermediate goods were 1.5% lower over the month. There was a large fall in fuel and lubricants imports (because of low oil prices).

On the services side of the ledger, the tourism balance continues to move in line with trends in the Aussie dollar (see right hand chart). Tourism exports are lifting (international visitors spending in Australia) and tourism imports have flat‑lined (domestic residents spending overseas). This trend is positive for domestic retailers and also the states that have a specialisation in tourism (in particular QLD).

Based on today’s trade data, along with other indicators, the current account deficit looks like it was smaller in QIII. And the terms of trade fell again over the quarter. A falling terms of trade means an drag on the income side of the economy. Our commodities strategists are expecting some further weakness in Australia’s key commodity prices over 2016.

Alongside this expectation is our forecast for the Australian dollar to depreciate further which puts more upward pressure on imported prices and also helps to lift AUD‑priced exports. This means that the income drag from a lower terms of trade has further to run and looks most likely to ease in late 2016.

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We recently wrote about how further mining capex is expected to decline (see report here).  Based on current indicators, Australia appears to be about 30% of the way through the mining capex decline.  The remaining downturn in mining investment will make a significant detraction from the economy, from a GDP perspective, but also from the impact on the labour market.  The labour‑intensive nature of the mining investment upturn means that a major risk from declining investment resides in the potential job losses.

To date, the labour market has held up reasonably well.  While the unemployment rate has increased by 0.1ppts over the past year (as the participation rate has increased by 0.3ppts), annual employment growth is running at a solid 2.1% (or 220K).  This outcome is a noticeable step up from the 1%pa employment growth a year ago.  Job gains in construction areas (related to the residential construction upturn) along with parts of the services industry (health, professional services, tourism) are more than offsetting mining‑related job losses.

The questions now are how many more mining‑related job losses will flow through the labour market? And will the labour market be strong enough to absorb these potential job losses?

Resource construction versus resource production employment

One of the offsets to declining resource construction jobs is the pick up in production/extraction jobs created as the mining boom enters the final (or third and operational) phase of the mining boom cycle.  But, the operational stage of the mining process requires much fewer jobs compared to the workforce required in the construction phase.

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The moderate increase in retail spending came in below market (and our own) estimates for a 0.5% increase.  Retail spending trends have disappointed over the past three months given all the positive influences on consumers at the moment.  These include lower interest rates, softer petrol prices, a lower Aussie dollar, higher housing construction lifting household goods‑related spending and a supportive Federal Budget for small business spending.  But at the same time, consumer sentiment remains sluggish driven by high unemployment concerns and wages growth is low.

Some of these positive influences were evident in the May data.  Household goods spending rose by 0.8% over the month thanks to an increase in areas related to residential construction (furniture, floor covering, houseware & textile goods and hardware, building & gardening supplies).  Higher construction drives household goods spending as consumers furnish their new homes.  The lift in dwelling prices also means that the costs of moving have increased and households are instead choosing to renovate.  The impacts of the petrol stimulus are not as evident as prior historical episodes would suggest.

Annual retail trade growth (at 4.7%) looks more respectable, especially given headline inflation running sub 2% at present.

Anecdotal evidence suggests that the small business package in the Federal Budget has had a positive influence on small business asset spending (e.g. electronics).  This impact should be more evident in the June data.

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In this analysis, CBA Economics outline how the States and Territories are performing across a range of economic indicators and detail our forecasts for State outcomes. This report is published quarterly, following the national quarterly GDP results.

Click here to view the report.

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• The RBA’s latest downgrade to growth forecasts were based on a more negative outlook for non‑mining capex.  In this context, the first estimate of 2015‑16 capex spending plans are critical.
• On our forecasts, Estimate 1 of 2015‑16 capex spending will come in around $120bn.  This outcome would be consistent with a sizeable drop in mining capex and a moderate lift in non‑mining capex.
• We expect the fifth estimate of 2014‑15 spending plans to come in near $153bn.
• Actual QIV capex is expected to fall by 4% over the quarter and detract from QIV GDP growth.

The QIV capex survey is due on Thursday 26 February.  In this release we receive the actual QIV capex data, the fifth estimate of 2014‑15 spending and most importantly, the first estimate of 2015‑16 spending.  In the last capex survey published three months ago, mining spending plans were downgraded while non‑mining plans remained intact which has been a similar theme in recent capex surveys.

For the upcoming capex survey, firms’ responses were recorded over January‑February.  Some positive influences for business confidence and conditions over the period were a lower Aussie dollar, lower oil prices and a cut in interest rates.  The negatives have been domestic political uncertainty, ongoing global growth concerns and continued weakness in commodity prices.  On balance, these influences are a net negative for business conditions which increases the risk of potential downgrades to mining and non‑mining capex plans.  The RBA’s latest downgrades to domestic growth were based around a new expectation that the recovery in non‑mining business investment would occur later than previously envisaged.  The RBA also marginally downgraded the outlook for mining investment because of weakness in commodity prices.

The focus in the next capex print will be on the first estimate of 2015‑16 capex expectations.  The survey is being taken around 5‑6 months before the start of the actual financial year.  At this stage of the year, firms usually tend to underestimatespending.  On our figuring, mining capex is expected to decline by a little over 20% in 2015‑16.  Non‑mining capex should lift by another 6% over 2015‑16 which would signify a moderate recovery.  Based on these outcomes, we expect Estimate 1 for 2015‑16 capital spending to come in at $120bn.  Median market expectations are sitting at $119bn.

For the fifth estimate of 2014‑15 capex expectations, firms are now 6‑7 months into the period so we should get a pretty decent read on expected spending plans.  We expect mining plans to come in around $85bn.  While historically mining firms have tended to upgrade spending expectations at this time of the year, the more recent trend has been a downgrade to capex expectations because of weakness in commodity prices.  We expect the fifth estimate of total capex plans to come in near $153bn (also the market median).  This outcome would indicate a marginal downgrade to expectations in the last capex survey published three months ago.

Actual QIV capex is an important input into national accounts calculations.  We expect to see a decent 4% fall in capex with engineering construction leading the fall.  Plant and equipment capex should be flat over the quarter.

Click here for the full report.

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The small rise in retail trade over December reflects subdued consumer confidence and anecdotes from retailers of modest Christmas spending.

Across the categories, the highest increase in spending over December was in clothing, footwear & personal accessories (+2.7%) and in food retailing (+0.3%).  Retail trade was weak in department stores fell (‑0.9%) and household goods (‑0.4%).  Spending was flat in other retailing and in cafes, restaurants and takeaway food services.

The pick up in clothing and footwear sales could be a reflection of the drop in the currency redirecting prior offshore spending (people travelling overseas and buying online) back onshore.  Growth in imported consumer goods and tourism debits looks to be slowing.

It was disappointing to see a drop in household goods spending.  In recent months, spending on items related to the residential construction upturn (such as hardware, building, garden supplies, furniture, floor coverings etc) was increasing at a solid rate.  We may see spending lift in this category looking ahead given the strong activity in the residential construction sector.

Following high growth rates over 2014, spending in cafes, restaurants & takeaway food services has fallen noticeably.  Annual growth is now near 5%, after running around 11% in mid‑2014.

In today’s data we also received the volume data.  Retail volumes rose by a high 1.5% in QIV, ahead of forecasts for a 1.1% rise.  The reason for the strong volume growth is because of weakness in retail prices.  Retail prices were flat over QIV which demonstrates the discounting and income pressures faced by the retail sector.  This is reflected in weak business confidence.  The “retail” component of the CPI was indicating a stronger outcome for price growth – around 0.6% over QIV.  Retail volumes look like they will add around 0.3ppts to QIV GDP growth.  We expect QIV GDP to be around 0.8% over the quarter and 2.6%pa.

Household disposable incomes are receiving a sizeable lift to disposable income from a lower petrol price.  On average, the drop in petrol prices should boost household disposable income by $60/month.  The RBA interest rate cut this month may also provide a boost.  But, there is the chance that consumers maintain their current repayment rates on mortgage debt, as we saw in the prior rate cutting cycle, which means the benefit to retail spending may end up being lower than expected.

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Residential building approvals are running at a record high.

We expect new dwelling construction to be 193K in 2015, staying near the record level of 2014.

New Dwelling Construction

Residential building approvals are running at a record high.  Following concerns of a slowdown in the housing sector in mid‑2014, approvals growth had a “double bounce” in late 2014.  Annual approvals are currently sitting at 199K which is 21% above the decade average.  Dwelling starts should total a record 198K in 2014 and 193K in 2015.  This compares very favourably to the 2005‑12 average of 155K.

In this construction upturn, multi‑unit dwellings have been the major driver of activity.  Currently, more than 40% of new dwelling investment is in the multi‑unit sector, much higher than the 30% of the long‑run average.

Because of the significant influence of the multi‑unit dwelling sector in new construction, there has been a tendency for construction activity to lag trends in approvals by longer than usual.  High‑rise developments normally have a longer start time after approval because of the more complex and extensive on‑site preparations, foundations and basements compared to the construction of a detached dwelling.

These long lead times are the major reason for our expectation for an extended plateau in the housing peak (especially when compared to other cycles).  As a proportion of GDP, new dwelling investment looks like it will increase to 3.1% of GDP in the second half of 2015 and plateau at that level for a few quarters.

State and local governments are promoting a greater proportion of multi‑unit developments, such as suburban and inner‑city apartments.  It should help contain transport and infrastructure costs for future residents and governments.  It may also assist in alleviating housing affordability pressures.  This could be mainly through supplying more lower priced dwellings in areas of high demand like the inner‑city.

Forward looking indicators of construction demand for houses and the multi‑unit sector have plateaued at record highs recently.  Building approvals look set to run at annual rates near 190k for some time yet.  This trend is important for new dwelling construction.  We expect interest rates to remain on hold over 2015.  It means that record low mortgage rates are likely to remain in place and will continue to stimulate demand for housing.

By Diana Mousina CBA Economics

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Labour market is weak: CBA Economics

Real wages growth will remain low while the labour market is weak.  Real household disposable income growth will continue to run at a below‑average pace and therefore act as a headwind to consumer spending.

• A run down in the savings ratio, rising wealth positions, a lower Aussie dollar redirecting retail spending onshore and more appetite for household borrowing are needed to drive momentum in consumer spending.
• We expect consumer spending growth of around 2.5% and 3.0% in 2014/15 and 2015/16 respectively.  This compares to the ten‑year average of 3.0%.

The outlook for household consumption has been a key area of uncertainty over recent months.  Retail outcomes have been mixed and consumer sentiment remains fragile.  The concern for the RBA is determining if the waning in consumption growth momentum will be a lasting issue, particularly if households have reassessed expected economic conditions to be worse than previously anticipated.  A return to more “average” consumer spending outcomes is one of the forecast components of the mining to non‑mining growth transition.  The RBA expect consumer spending growth to improve considerably by 2016 because of an increase in household wealth and moderate income growth.

Wages growth is currently running at the slowest level for 16 years and real wages are declining.  If real wages growth is negative, what will drive momentum in consumer spending growth?

Our forecasts for moderate consumer spending growth are based on the assumption that:

1.  There will be some run‑down in the savings ratio
2.  Household balance sheets will remain in good shape
3.  A lower Australian dollar will redirect some retail spending onshore
4.  Consumer borrowing growth will fund additional spending

The risk from weak income growth

Changes in household disposable income growth are a key factor in determining potential changes in consumer spending.  The importance of income growth to household spending means that it is normal for consumer spending and household disposable income growth to run in similar cyclical patterns.

Click here to read the full report.

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Housing and business credit rose in May

Annual credit growth is running at the highest level since March 2009.  Annual growth has stepped up from 3.0% to 4.7% over the past year.  The lift in credit growth is a natural response to lower levels of interest rates and some recovery is risk appetite.  While overall credit growth levels remain well below long‑run average levels, the RBA would prefer not to see another debt‑fuelled cyclical upswing.  If credit growth continues expanding at the current trend pace of 0.4%, annual growth rates will top out at around 5%pa.

Housing credit growth continues to lift and annual growth (at 6.2%) is now at the highest level for nearly two years.  The dominant driver of higher housing credit growth is investor lending.  Unlike in other housing upswings, investor activity has accounted for a larger than usual proportion of housing activity.  For example, in the year to April, total owner‑occupied housing loans financed accounted for 56% of activity and investor loans were 38%.  This compares to the housing upswing in 2009 when owner‑occupier accounted for 62% and investors 31%.  Rental yields have fallen recently which is natural as dwelling prices increase.  Lower rental returns should dampen investor activity.

Housing credit growth (6.2%pa) is now running well above income growth (4.4%pa) which means that the household debt‑to‑income ratio is rising again.  The RBA will be watching changes in the debt‑to‑income ratio closely to ensure that household balance sheets remain sound.  The recently released financial accounts indicated that that the household debt‑to‑disposable income ratio increased to 183.5 in QI (167.4 in QIV).

Broad money growth is often taken as a proxy for the savings rate because it is the widest measure of deposits held.   Annual growth in broad money is roughly unchanged on QI which suggests that the savings ratio has remained stable.

Business credit growth remains low but is showing signs of faster growth (annual growth is 2.7%pa compared to 1.0%pa this time a year ago).  Business sentiment has held up despite the post budget drop in consumer confidence.  Other data indicates that business lending has risen significantly over the past few months.  We also suspect that a large proportion of businesses are using this period of low interest rates to pay down debt.  The credit data is a measure of the stock of credit which means that it may not capture the surge in lending if businesses are paying down debt.

Other personal credit growth remains weak and fell by 0.3% in May (0.3%pa).

There do not seem to be any signs of an immediate post‑Budget impact on credit growth.  Housing credit growth remains strong, business credit is picking up and the weak trend in other personal credit has continued.

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