Australian private sector capital expenditure rebounded in the December quarter but at a weaker pace than anticipated as residual lockdown effects and supply chain pressures weighed on equipment spending. Forward-looking investment plans in 2021/22 were upgraded, while year-ahead plans were higher than they have been in many years as firms look beyond the pandemic.
CapEx — Q4 | By the numbers
- Private sector capex rebounded by 1.1% in Q4 to $33.3bn (9.8%Y/Y), broadly reversing the 1.1% decline in Q3 but coming in lower than the 2.5% rise forecast.
- Equipment, plant and machinery capex eased lower by 0.1% to $15.9bn (8.4%Y/Y), coming on the back of a sharp fall in Q3 (-3.3%).
- Buildings and structures capex lifted by 2.2% to $17.4bn to be 11.2% higher through the year.
- Firms' 5th estimate of capex plans in 2021/22 was upgraded by 1.6% to $140.7bn, pointing to a year-to-year rise of 15.9%. Meanwhile, the 1st estimate of year-ahead plans was nominated at $116.7bn, its highest since 2014/15.
CapEx — Q4 | The details
The upturn in Australia's capex cycle generated by the economic recovery from the pandemic recession stalled over the second half of the year as lockdowns returned and pressures in global supply chains weighed on equipment spending. In the first half of the year, capex surged by 9.9% before stalling (0%) over the back half. Lockdowns during the Delta wave drove a 1.1% fall in Q3, which then rebounded at a slower-than-expected pace in Q4 following the reopening of affected states. Overall, this left capex at $33.3bn, equating to a 2.3% rise on its pre-pandemic level.
Driving the second half weakness in capex was equipment spending, which contracted by 3.5% in the period compared to a 12.3% surge in the first half. Government tax incentives, accommodative financing conditions and the broader recovery in the economy supported the first half surge before it gave way amid the headwinds from lockdowns and supply chain pressures in the second half.
Non-mining capex was unable to rebound from Q3's fall (-3.6%) coming in broadly flat in Q4 (0.3%), while in the mining sector equipment spending declined for a third consecutive quarter (-2.3%). As the economy weakened with much of the nation returning to lockdown in Q3, demand conditions were hit hard leading to firms delaying equipment spending. The international trade figures for imports of consumption and capital goods were weak over Q4, indicating that supply chain pressures also contributed to holding back business investment. In particular, weakness in vehicle (-10.2%) and industrial equipment (-5%) spending intensified over the quarter, pointing to the effect of the global semi-conductor shortage.
Accordingly, the weakness in equipment spending showed up in goods-related (-0.9%) and business services (-2.9%) industries. In the goods-related area, weakness in wholesale trade was the driver (-6.6%) as it includes categories such as heavy farm machinery and warehouse equipment. Business services equipment was hit by weakness in professional services (-15.3%), potentially due to shortages of IT equipment; rental, hiring and real estate also declined (-2.4%), with this category including vehicle hire services that have struggled to rebuild fleets.
In contrast to falling equipment spending, buildings and structures capex lifted over the second half (3.3%) despite restrictions in the construction sector. This is consistent with yesterday's construction activity data (see here) that reported non-residential construction picked up pace over the back half.
Turning to investment plans, firms upgraded expected spending in 2021/22 by 1.6% on the estimate put forward 3 months earlier to $140.7bn. This increase was in line with historical upgrades from estimates 4 to 5 but weaker than I had anticipated ($145bn). Overall, this suggested capex is on track for a 15.9% rise compared with 2020/21. Non-mining capex plans were lifted by 1.7% to $98.1bn, centred on a rebound in equipment spending as the supply issues clear (3.5%). Mining capex plans were revised up by 1.2% to $42.7bn.
Year-ahead plans in 2022/23 were estimated at $116.7bn. Although there is a large degree of uncertainty around the evolution of these plans, this was the strongest 1st estimate for total capex since 2014/15.
CapEx — Q4 | Insights
Lockdown and supply chain disruptions held back equipment spending over the second half of 2021, weighing on business investment. However, there has been some offset from non-residential construction. As the economy rebounds to its pre-Delta momentum and supply chain pressure ease, equipment spending should regain its momentum, bolstered by the support of government tax incentives and accommodative financing conditions. Forward-looking investment plans continue to improve, indicating many firms are optimistic about the economic outlook beyond the pandemic.
