Australia's June quarter capital expenditure survey is due to be published by the ABS at 11:30am (AEST) today. Following a soft first quarter, capex is expected to regain momentum and rise by 1% in the June quarter. Forward-looking investment plans for 2022/23 should be upgraded strongly as firms respond to capacity constraints after a period of deferred investment over the Covid period.
The capex cycle is in an upswing phase that stalled somewhat in the March quarter following a 0.3% decline. This was due to weather-related disruptions with heavy rainfall and flooding experienced in parts of New South Wales and Queensland, which weighed on buildings and structures spending (-1.7%).
Equipment spending lifted by 1.2% in the quarter to be more than 6% higher than pre-Covid levels, supported by Australia's robust economic recovery, accommodative financing conditions and tax incentives.
Non-mining sector capex was 0.3% lower in the quarter and remained just below what were subdued pre-Covid levels (-0.5%). Although equipment spending has been strong in the rebound, spending on buildings and structures has lagged well behind. Mining sector capex also declined by 0.3%q/q but had risen by 9.7% over the past year, albeit from low levels.
Firms' investment plans for 2021/22 lifted modestly (1.4%) to $142.8bn, up 15.5% on the comparable estimate a year earlier when the outlook coming out of the pandemic was highly uncertain.
The 2nd estimate of investment intentions in 2022/23 saw a sharp upgrade of around 12% compared to estimate 1 to come in at $130.5bn, though some of this reflects an inflation component. There were upgrades to the outlook in the non-mining (13.3%) and mining sectors (8.7%).
Market expectations | Capital Expenditure
In today's report, the consensus estimate is for a 1% rise in quarterly capex, with the range of forecasts sitting between -1.3% and 4%. Regarding the intentions component, no consensus is put forward for the 3rd estimate of 2022/23 plans. The history of the series indicates investment plans rise by around 10-11% on average from estimates 2 to 3. That points to a figure of around $144bn, though I think investment plans could come in a little higher with many firms playing catch up after deferring projects over the past couple of years through the Covid period, particularly with capacity constraints becoming more pressing.
Much of the focus will be drawn to the investment plans component for 2022/23. Many firms are running up against capacity constraints amid strong demand conditions. A period of deferred investment through the pandemic and labour market churn leaving staff shortages has accentuated the situation. The most recent NAB Business Survey showed capacity utilisation among firms hit a record level in July. Firms will need to expand capex to sustain production in this environment.
