• But businesses have cut spending plans for the current year. Investment expectations for the current year have been culled by 2.3 per cent – the second straight downward revision.
• Mining investment rose by 14.0 per cent in seasonally adjusted terms while manufacturing spending fell by 1.5 per cent in the March quarter. Investment spending rose in five of the eight state/territory economies.
• The second estimate of investment for 2012/13 was $172.98 billion, up 4.3 per cent on the first estimate but below the usual upgrade of 6.4 per cent. However it is still up 23.5 per cent on a year ago.
• Dwelling approvals slump: Dwelling approvals fell by 8.7 per cent in April after rising by 6.0 per cent in March. House approvals fell 12.2 per cent and apartments fell by 1.7 per cent.
• Lending remains weak: Private sector credit (lending) rose by 0.4 per cent in April after a 0.5 per cent rise in March. Annual credit growth rose from 3.4 to 3.8 per cent. Housing credit grew by 0.4 per cent in April. Housing credit is up 5.3 per cent on a year ago – the weakest annual growth in records going back 34 years ago.

What does it all mean?

• Encouraging, but not over the top. That’s the best way to sum up the latest investment figures. Businesses are still spending on new equipment and buildings. But short-term spending plans have been slashed with a record $5.9 billion worth of building investment plans being mothballed by private businesses over the past three months. And while expectations for spending in the next financial year remain strong, there is a little more caution apparent in the latest estimates.
• The era of “new conservatism” certainly doesn’t reside just with consumers – businesses are also hesitant to spend. The good news is that businesses are hopeful that economic conditions pick up over the next year. But if they don’t – as we’ve seen this year – spending plans will quickly be cut or shelved. As always, the further out businesses look, the less certain they are about their spending plans.
• Investment hit record levels in the latest quarter, but the gains are squarely focused on the resource states of Western Australia, Queensland and the Northern Territory. In fact the two states and territory accounted for 95 per cent of the increase in investment spending in the March quarter.
• The Reserve Bank will be encouraged by the latest estimates of business investment. The Reserve Bank holds to the belief that over the longer term economic growth is expected to be relatively robust and be driven by an investment boom – and if anything the latest data confirms that view. However while investment plans are at present solid, the ongoing growth concerns in China and sovereign debt issues in Europe will determine if business follow through on expected investment.
• In addition it was encouraging to see that inflationary pressures were well contained with the cost of investment only recording a subdued 0.2 per cent annual gain. The cost of new equipment continued to falling in line with the strong dollar, while the cost of building and structures was flat.
• The slump in building approvals is certainly not great news for tradespeople and retailers. But the latest result is effectively a reversal of the prior month’s gains. The fundamentals for the sector remain sound particularly with a lack of building, strong population growth and further rate cuts likely, but it really comes down to confidence. A substantial pick up in confidence is needed to justify the turnaround.
• The private sector credit data tends to be a good forward-looking indicator on activity. If borrowings pick up, spending should follow suit over the next few months. In that context the lack of significant growth is disappointing. However there seems to be modest improvement in business borrowing. Business credit has recorded to healthy back to back rising by 0.7 per cent in April. The lower fixed and variable rates seem to be enticing a bit more borrowing to take place. It is still early days but the signs are encouraging.
• However the lacklustre personal credit continues to paint a picture of a conservative Aussie consumer. In fact in annualised terms growth of personal credit is holding at 2½-year low. Looking forward a sizeable lift in consumer confidence will be required to justify a turnaround in household spending. At present it looks like the sluggish consumer spending environment will dominate the economic landscape over the next six months.
• Overall the latest round of data continues to paint a mixed picture of the domestic economy. Business investment is expected to be the ongoing driver of domestic growth. However given the sovereign debt concerns continue to escalate it is likely that the Reserve Bank would want to take out an added level of insurance in coming months. CommSec has pencilled in the next rate cut to take place in August however the risks are it may occur earlier. In fact financial markets are fully pricing in a quarter of a per cent rate cut next week.

What do the figures show?
Private business investment

• Business investment (spending on buildings and equipment) rose by 6.1 per cent in the March quarter. Spending is up a 28.6 per cent on a year ago.
• Spending on buildings rose by 10.5 per cent in the quarter. Spending on equipment fell by 0.1 per cent. Investment in buildings and structures stands 48.9 per cent higher than a year ago – the largest annual increase since December 2005. Equipment investment was up by 6.2 per cent on a year ago.
• Spending in the mining sector rose by 14.0 per cent in the March quarter after a 3.9 per cent rise in the December quarter. Spending in manufacturing fell by 1.5 per cent while investment in “other selected industries” fell by 1.3 per cent. In annual terms mining investment was up 80.1 per cent on a year ago.
• Investment rose in five of the eight states and territories in the March quarter. The biggest increase was in the Northern Territory (up 61.3 per cent), followed by Western Australia (up 11.4 per cent), South Australia (up 6.8 per cent), Queensland (up 4.3 per cent) and Tasmania (up 2.4 per cent). Spending fell most in the ACT (down 12 per cent) followed by NSW (down 4.4 per cent) and Victoria (down 4.0 per cent).
• The overall deflator for investment goods rose just 0.3 per cent in the March quarter. The cost of buildings and structures was flat in the quarter while the cost of equipment fell by 0.1 per cent.
• Over the year, the cost of investment goods rose by 0.2 per cent. The cost of buildings rose by 1.4 per cent over the year, while the cost of investment equipment fell by 3.6 per cent.
• The sixth estimate of investment for 2011/12 was $158.028 billion, down 2.3 per cent on the fifth estimate and up 27.5 per cent on the estimate made in the March quarter last year for the 2010/11 year.
• The second estimate of investment for 2012/13 was $172.98 billion, up 4.3 per cent on the first estimate, below the usual upgrade of 6.4 per cent but still up 23.5 per cent on a year ago.

Building Approvals:

• New dwelling approvals fell by 8.7 per cent in April. Approvals to build houses fell by 12.2 per cent in April (private sector houses down 11.1 per cent). Approvals to build new apartments fell by 8.1 per cent (private sector down 2.3 per cent).
• Dwelling approvals rose in four of the six states in April. Victoria led the gains with approvals up by 13 per cent in April after sliding by 5.9 per cent in March followed by Tasmania (up 9.2 per cent). Approvals fell the most in Western Australia (down 46.7 per cent), followed by South Australia (down 27.8 per cent), NSW (down 15.3 per cent), and Queensland (down 2.7 per cent).
• The value of building approvals was down 5.4 per cent in April and was down 21.2 per cent on a year earlier. The weakness was driven by new residential construction down 7.3 per cent in April to be 21.7 per cent lower than a year ago.

Private sector credit

• Private sector credit (lending) rose by 0.4 per cent in March after a 0.4 per cent rise in February. Annual credit growth held steady at 3.4 per cent.
• Housing credit grew by 0.4 per cent in March after a similar rise in February. Housing credit is up 5.3 per cent on a year ago – the weakest annual growth in records going back 34 years.
• Owner occupier housing credit rose by 0.3 per cent in March to stand 5.5 per cent higher than a year ago. And investor housing finance lifted 0.5 per cent in March to be up 4.8 per cent over the year.
• Personal credit rose by 0.1 per cent in March. Personal credit was down 1.5 per cent over the year, holding near the biggest decline in over two years.
• Business credit rose by 0.6 per cent after a 0.4 per cent fall in February. Business credit is 1.3 per cent higher than a year ago.

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.
• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

• A sustained lack of new building can have serious ramifications for affordable housing. Already vacancy rates across the country are low, and given the ongoing lift in migration, further building will be required to alleviate the pickup in demand. No doubt the lack of new housing construction will be closely assessed by policymakers.
•  The key factor is confidence. The outlook for the economy looks bright from a longer-term perspective but the lack of confidence is resulting in a dearth in activity.
• The Reserve Bank has plenty of scope to cut interest rates, and we anticipate policy makers will look to do just that over the next three months – that is, reduce interest rates by a quarter of one per cent.

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• 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.

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• New business investment rose by 6.2 per cent in the September quarter – the biggest increase in three years. Mining dominated investment plans with investment in the sector up by 15.6 per cent as opposed to manufacturing investment which fell by 6.3 per cent in the September quarter.
• Equipment spending fell by 1.1 per cent in the quarter while spending on buildings rose by 13.4 per cent.
• Businesses expect to invest $123.9 billion in the 2010/11 year unchanged on the third estimate from the June quarter and slightly down on the usual (decade average) upgrade of 1.7 per cent made by firms at this time of the year. Investment plans are up 19.5 per cent on the equivalent estimate made a year ago.

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