While today's update is expected to be relatively subdued, the outlook for business investment is constructive and should support economic activity over the next couple of years. Investment from the non-mining sectors of the economy is expected to lead the way, supported by a solid pipeline of infrastructure projects and building work. Meanwhile, indications are that mining sector investment is nearing its trough after several years of decline following the wind down from the construction-led boom in the early part of the decade. Surging commodity prices are likely to firm expectations that mining sector investment will finally begin to rise from 2019/20.
As it stands | Capital Expenditure
Capex lifted by a stronger-than-expected 2.0% in Q4 to $30.1bn (market forecast was +1.0%). That was led by a 3.2% increase in spending on buildings and structures to $16.1bn, while equipment, plant and machinery recorded a modest rise of 0.7% to $14.0bn.
The intentions component showed the 5th estimate for capex in 2018/19 was $118.4bn, representing a 3.6% increase on the same estimate from a year earlier. This was the strongest year-to-year increase for the 5th estimate since 2011/12. Through the year, non-mining investment was projected to rise by 8.5%, moderated by a 6.8% decline from the mining sector.
Estimate 1 for investment intentions in 2019/20 was nominated by firms at $92.1bn, which was the highest level since 2015/16 and 11% above the 1st estimate put forward for 2018/19. Notably, mining sector capex was forecast to rise (+21.4%) for the first time since 2012/13. The non-mining sector was expected to provide a more modest increase (+6.6%).
In today's survey, markets forecast capex to rise by 0.5% in Q1. The investment intentions component in Q1's survey are based on data compiled by the ABS during April and May and will include the 6th estimate of capex for the current financial year (incorporating 9 months of actual expenditure and 3 months of forecast investment) and the 2nd estimate of expected capex for the full 2019/20 financial year.
Markets tend focus more on the investment intentions component in this release and will be closely watching the 2nd estimate for 2019/20, which according to Bloomberg is forecast to come in at $96.0bn. That outcome would represent a 4.2% upgrade from estimate 1 at $92.1bn and a rise of 9.2% on estimate 2 from a year earlier. Meanwhile, the 6th estimate for 2018/19 is likely to firm to around $120.0bn.
What to watch | Capital Expenditure
The capex survey provides a lead towards next week's GDP growth figures for Q1, with these data covering a little over half of total business investment. In particular, watch for the outcome from capex on equipment, plant and machinery in Q1, as this provides us with the best indication of the contribution this component will make to overall business investment in the quarter.
For investment intentions, watch out for the 2nd estimate of capex for 2019/20. While noting that the early estimates do not always turn out to be an accurate guide for future investment activity, the 1st estimate for 2019/20 was seen as a robust result by markets. A miss on expectations today ($96.0bn) would clearly disappoint, particularly as it would be reasonable to expect a firmer result from the mining sector on the back of the recent surge in commodities prices. Another factor to consider is that today's report would have largely been compiled by the Bureau pre the result of the recent federal election, so it may be wise to wait for Q2's update for a clearer picture of firms' investment intentions.
