Australian CapEx -0.2% in Q3; 2019/20 investment plans $116.7bn

Australian private sector capital expenditure (capex) declined for the third consecutive quarter in Q3, highlighted by weakness in equipment spending. Investment plans for 2019/20 were softer than anticipated and is centred on a downgrade in the non-mining sector.

CapEx — Q3 | By the numbers

• Total private sector capex spending fell by 0.2% (-$68m) in Q3 to $29.41bn against the median forecast for a stable outcome (0.0%). Capex declined by a downwardly revised 0.6% in Q2 from -0.5%. In annual terms, the pace of decline in capex lifted to -1.3% from -1.0%.

• Equipment, plant and machinery investment fell by 3.5% in the quarter (prior rev: +2.0%q/q), or by $488m to $13.56bn. This swung the annual pace from an acceleration of 5.9% to a contraction of 2.4%.

• Buildings and structures investment increased by 2.7%q/q (prior rev: -3.0%), or by $420m to $15.85bn, with the annual decline falling to just -0.3% from -6.4%.

• The 4th estimate of investment plans for the 2019/20 financial year was $116.7bn, which was softer than the $120.0bn figure anticipated by markets. Investment plans were upgraded by 3.4% compared with the previous estimate nominated by firms 3 months earlier and implies only a modest 2.5% year-to-year rise in capex spending.

CapEx — Q3 | The details 

Total capex spending by private sector firms contracted for the 3rd straight quarter with a modest fall of 0.2% in Q3 to be down by 1.3% over the past year. The weakness has centred on the non-mining sector of the domestic economy, in which capex spending fell by a further 1.8% in Q3 (-$388m) to drive the annual pace into a contraction of 2.3% — its weakest since Q4 2015. 

Breaking this down further, the slowdown in non-mining business investment has been driven by the services sector. Capex by services firms contracted by 2.7% in Q3 (-$518m) to $18.44bn and follows declines of 2.7% in Q2 and 1.4% in Q1. Over the year, services sector capex fell by 3.0% to be contracting at its fastest pace in nearly 4 years. Here, the weakness has been focused on equipment spending, though this has been moderated by rising investment in buildings and structures. The manufacturing sector saw capex rise by 5.5% in Q3 ($130m) to $2.50bn to be up by 3.0% over the past year, supported by investment in facilities and plant and equipment, though this is within the context of a wider downtrend since 2017. 

Mining sector capex lifted by 3.9% in Q3 ($321m) — its strongest quarterly rise in more than 7 years — to $8.47bn, with annual growth turning positive for the first time since the March quarter of 2013 at 1.2%. With projects now complete, mining firms will turn their focus to investment that will sustain and or expand production. 

The state detail showed declines in capex spending in Q3 occurred in New South Wales -0.3% (+2.0%Y/Y), Victoria -1.0% (+4.3%Y/Y), South Australia -7.0% (-1.3%Y/Y), Tasmania -23.1% (-31.8%Y/Y), Northern Territory -13.5%q/q (-48.2%Y/Y) and the ACT -12.2% (+4.6%Y/Y). The mining states of Queensland and Western Australia saw capex rise by 2.3% (-1.7%Y/Y) and 1.6% (-2.1%Y/Y) respectively in Q3.

The 4th estimate of investment plans for the 2019/20 financial year was nominated by firms at $116.69bn; a figure which includes 3 months of actual spending details and a forecast for the remaining 9 months. As such, firms upgraded their anticipated level of capex spending in the current financial year by 3.4% on the total they put forward 3 months earlier, while also implying a 2.5% increase compared with 2018/19. However, in Q2's capex report, firms had upgraded their expected level of capex spending in 2019/20 by 14.4% on estimate 2 and this implied a year-to-year increase of 10.2%. Thus, over the past quarter, firms have sharply scaled back their investment plans for 2019/20. In the RBA's recent quarterly Statement on Monetary Policy, business investment was forecast to rise by 6.9% in 2019/20.  

Leading the downgrade has been the non-mining sector, in which aggregate capex spending is now projected to fall by 2.8% in 2019/20 to $78.31bn. In Q2's report, non-mining investment was anticipated to rise by around 6% over the year. The weakness is driven by the services sector, with investment projected to fall by 3.3% over the year to $68.57bn, however manufacturing capex is anticipated to rise by 1.0% to $9.74bn. In the mining sector, the outlook is strong with capex projected to rise by 15.7% over the current financial year, which would be its first year-to-year increase since 2012/13.

CapEx — Q3 | Insights   

Ahead of next week's Q3 GDP growth figures, today's report pointed to another quarter of softness from business investment. In terms of investment plans, the outlook for the mining sector remains robust, though that is to a large extent moderated by a downgrade in the services sector. This is likely a reflection of below-trend conditions and confidence of firms highlighted in NAB's Business Survey. Business investment is facing strong headwinds across the globe from trade and geopolitical uncertainty and within that backdrop domestic firms are cautious.