Independent Australian and global macro analysis

Monday, August 31, 2020

Net exports and public demand to add to Q2 GDP growth

Tomorrow's national accounts will likely report that the Australian economy contracted in the order of 6% in the shutdown-disrupted June quarter after the estimates for net exports and public demand pointed towards positive contributions from those components. 

Balance of Payments - Government Finance  — Q2 | By the numbers
  • Australia's current account remained in surplus for a 5th consecutive quarter widening to $17.7bn in Q2 in a stronger-than-expected outcome ($13.0bn). The surplus reported in Q1 was revised up to $9.0bn from $8.4bn.
  • The surplus on the trade balance lifted to a new record high of $23.9bn from $19.1bn (revised from $19.2bn). 
  • The income deficit narrowed sharply to $5.6bn from $9.9bn (revised down from $10.6bn)
  • Net exports are expected to add 1.0ppt to GDP growth in Q2. 


  • The separately released Government Finance data from the ABS reported that public demand was expected to add 0.6ppt to Q2 GDP growth, led by a 2.9% lift in consumption expenditure.

Balance of Payments - Government Finance — Q2 | The details 

The past year has come very much against the run of play in the nation's history with the current account remaining in surplus over this period, something not seen since the early 1970s. Australia has tended to run deficits on its current account, with demand for domestic investment opportunities typically exceeding the pool of savings from which to fund them, thus requiring capital to be imported from offshore sources. However, the ramp-up in resources production following the investment upswing in the sector in the early 2010s (followed by the subsequent unwind) and favourable price movements has shifted the dynamic. This was then exacerbated in the June quarter by the volatility in trade flows that were enormously disrupted by pandemic restrictions. As a result, the trade balance has widened to $23.9bn, with the import side (-14.1%q/q) being more severely affected than the export side (-7.8%q/q). Adjusting for price movements, the volume of imports contracted by 12.9% in the June quarter, while export volumes fell by a smaller 6.7%. For GDP purposes, this will lead to a positive contribution of 1.0ppt in Q2. 


The story around the pandemic restrictions centres very much on the services sector, with the border closures and travel bans greatly restricting movement in and out of Australia. The import of services collapsed by 50.5% in Q2 (compared to a 2.4% fall from goods imports), largely reflecting the ban on overseas travel, which came to a near-complete stop in Q2 (-98.7%). Services exports fell by 18.4% in Q2 (goods exports were down by 3.5%) reflecting the ongoing loss of inbound travel (-24.4%q/q), though this remains supported to some extent by foreign students that have stayed on in Australia through the pandemic.

    

Meanwhile, the sharp narrowing of the income deficit reflected the impact of volatilty in the financial markets leading to lower returns for offshore investors.


In the latest Government Finance data for the June quarter, the ABS reported that government expenditure lifted by 2.9% to $99.7bn, while underlying investment (adjusted for private/public transfers) declined 1.8% to $23.5bn. Overall, the ABS advised public demand was expected to add 0.6ppt to Q2 GDP growth.   

Balance of Payments - Government Finance — Q2 | Insights 

The Australian economy likely contracted in the order of 6% in the June quarter reflecting the full scale of the disruption of containment measures on activity, albeit with considerable uncertainty remaining around the consumption of household services. 

Preview: RBA September meeting

The Reserve Bank of Australia Board's monthly meeting takes place today, with the status quo on policy settings expected to remain when Governor Philip Lowe hands down his decision statement at 2:30PM (AEST).



Communications from the RBA over the inter-meeting period have come across as less optimistic, in part due to the impact of the reversal of Victoria's reopening, which the Bank forecasts to subtract at least 2 percentage points from national GDP growth in Q3. Beyond this though, the August Statment on Monetary Policy downgraded the pace of the economic recovery in 2021 from 6% to 5%, with household spending to improve on a less robust trajectory and the effects of international travel restrictions to persist for longer. Meanwhile, the unemployment rate is now forecast to take longer to rise to its peak level, reaching 10% by the end of 2020, and then decline more slowly over the following couple of years. This led Governor Lowe at the RBA's recent parliamentary testimony to leave the door ajar for further policy support, including a lower but still positive cash rate, a separate bond purchase program, and changes to the specifications of its Term Funding Facility (TFF).   

Over the inter-meeting period, the restart of the RBA's bond purchases announced at the August meeting has resulted in $10bn of Australian Government Securities being added to its balance sheet over the past 4 weeks to bring the yield on 3-year maturities closer to the 0.25% target and to support market functioning amid some $34.5bn in new AOFM bond issuance. Meanwhile, drawings under the TFF are reported to have increased by $12.9bn to $41.6bn in total. Of most interest to markets will be the extent to which the governor discusses the possibility of more support. This follows last week's announcement from the US Federal Reserve of its shift to an average inflation targeting regime, pointing to a longer period of accommodative settings from the world's most influential central bank. On the back of this, the Australian dollar has continued to strengthen lifting by around 3% against the US dollar to around 0.7350.

Virus concerns return

The ABS Household Impacts of COVID-19 survey for August reported a rise in virus-related concerns in Australia, with the impact of the outbreak in Victoria spilling over into the other states. This was the first report in a new longitudinal survey from the ABS looking into the response of households to the pandemic and is similar to the first round of 8 surveys conducted between April and July with around 1,500 respondents. 

In this survey, the main topic was around the wellbeing of households. As of mid-August, over the preceding 4-week period 46% of respondents reported that they felt nervous "at least some of the time". Despite the vast differences in conditions in Victoria (in a stringent shutdown) and the rest of the nation (operating under a relaxed set of restrictions), the level of nervousness in Victoria (48%) was similar to Australia overall (45%). Though we are comparing two different groups here, the first round of surveys reported nervousness in mid-April was at 35% before it declined to 25% by late June a little more than a month after the reopening of the nation started. A similar trend was evident across a range of other feelings, with the chart (below) highlighting no clear differences in Victoria to Australia as a whole.  


Where the differences did show up was in the level of participation in activities over the week to mid-August. With stringent activity restrictions in place and mobility in general reduced, Victoria predictably lagged behind the rest of the nation which has been able to maintain progress on the path to recovery with new virus cases staying under control. 

Source: ABS 

The survey also contained details about household finances. Overall, levels of household financial stress appear to remain low but have increased slightly since the topic was addressed by the first group of respondents in mid-June. In this latest survey, 87% of Australians expected they would be able to meet all their bills over the next 3 months, down from 94% in mid-June. When asked of their capacity to raise the sum of $2k for something important within a week, 77% reported they would be able to do so compared with 88% previously. Meanwhile, regarding the use of the Federal Government's income support measures, payment of household bills, mortgage and rent payments and savings remained highly prominent.      

Sunday, August 30, 2020

Australian Business Indicators Q2: Inventories -3.0%

The latest ABS Business Indicators report was an extraordinary account of the economic disruption and policy environment as a result of the pandemic in the June quarter. Inventories declined sharply, while company profits were boosted by government support measures.  

Business Indicators — Q2 | By the numbers 

  • Inventories fell by their most on record -3.0% in Q2 to $157.9bn; much larger than the 1% decline forecast (prior -1.4%). The decline in annual terms extended from -2.4% to -4.7%, also its weakest pace on record, surpassing the low of the early 1990s recession. 
  • Company gross operating profits soared by 15.0% to $109.61bn in Q2, driven by government support measures, as the annual pace advanced from 1.8% to 11.3%. 
  • Wages and salaries posted their largest contraction on record falling by 3.3% in Q2 to $141.92bn, with the annual pace rolling over to -1.1% from 3.9%.


Business Indicators — Q2 | The details

Reflecting very weak demand conditions through the shutdown as well as disruptions in production, inventories contracted by 3.0% in the June quarter following on from a 1.4% pullback in Q1. Over the period, inventory volumes were reduced by 4.3% and by 4.7% through the year; the latter an outcome weaker than the low point from the nation's previous major economic downturn in the early 1990s, itself a very severe and protracted recession. The steepest declines in Q2 came through from accommodation and food services (-11.6%) and retail trade (-7.8%), sectors that were both significantly disrupted.  
   

Company gross profits showed a 15.0% rise in the June quarter to $109.61bn (11.3%yr), with the ABS reporting this was boosted by the receipt of subsidies from the Federal Government to offset the impact of trading disruptions from the activity restrictions. This accrued to non-mining companies, with gross profits across the sector surging up by 25.5% to $71.68bn (25.5%yr), as mining profits softened by 0.7% to $37.93bn, rolling over through year to -8.3% from 3.0%. 


Reflecting the impact of the disruptions on companies across the economy, sales income was down heavily in all bar the utilities industry. Sales in the two industries most dirsputed by the activity restrictions plunged in Q2 with accommodation and food services -39.1% and arts and recreation -37.1%.


The wages and salaries measure collapsed by 3.3% in the June quarter in response to the activity restrictions leading to a large section of the workforce either being stood down or having their hours reduced. A proxy for the nation's wages bill, the level in the June quarter at $141.9bn fell to its lowest since Q1 2019.  


Business Indicators — Q2 | Insights

The June quarter was exceptionally tough for Australian firms as activity restrictions disrupted normal trading and economic uncertainty led to confidence collapsing. The fiscal support measures from the Federal Government for businesses and households have been significant and have helped to mitigate the full impact of the pandemic. As the restrictions started to be eased from mid May, a strong economic rebound was emerging before it started to show signs of stalling as virus-related concerns returned, most notably in Victoria.    

Friday, August 28, 2020

Macro (Re)view (28/8) | Shift in the policy regime

This week's virtual meeting of central bankers for the Jackson Hole Symposium was headlined by the unveiling of the shift in the Federal Reserve's monetary policy framework. A more than 18-months-long review conducted by the Fed into how it uses its tools and communicative strategies to meet the objectives assigned to it by the Congress has formalised a revamped approach to monetary policy decisionmaking and this is likely to be a sign of things to come for other central banks across the globe. How this is to be carried out remains unclear, but what markets were told was that the Fed's reaction function has changed. Previously, a key factor influencing the Fed's conduct of monetary policy was the linkage between the level of unemployment and the rate of inflation. The conventional thinking being that a tight labour market would ultimately lead to the economy overheating, thereby encouraging inflation to rise to a level above its target (2%). However, despite the labour market tightening progressively over the years that followed the GFC, inflationary pressures never sustainably took hold, neither in the US nor in other economies across the globe. The emergence of the pandemic crisis has since upended labour markets and led to disinflationary pressures overall. The key message in the speech delivered by Federal Reserve Chair Jerome Powell was that monetary policy will now be set in such a way that will encourage the economy to strengthen, without being as sensitive to the prospect of rising inflation as before.

Mindful of the damage inflicted on society through the dislocation to the labour market caused by the pandemic, Chair Powell effectively signaled that its reaction function will now give greater prominence to its maximum employment objective. To that end, the Fed's framework now states that policy decisions will be guided by "shortfalls of employment from its maximum level". The Fed will not be tied to nominating a targeted level for the unemployment rate, but it will seek to drive it down until it sees clear signs that longer-run expectations of inflation are moving to uncomfortably high levels (i.e. above its 2% target). It is this focus on expectations for the future level of price increases that facilitates the Fed's move to a regime of average inflation targeting. The Fed will now have the flexibility to consider earlier periods of too-low inflation and set monetary policy to encourage inflation to be "moderately above 2 percent for some time". Distilled simply, its price stability objective is now to "achieve inflation that averages 2 percent over time". More detail on how the Fed now sets about achieving its objectives will be expected by the markets at the September FOMC meeting, with a more explicit form of forward guidance and greater clarity on asset purchases in the mix to be announced.


The European Central Bank was also represented at the Jackson Hole Symposium in which its Chief Economist Philip Lane presented a speech outlining the importance of its pandemic emergency purchase programme (PEPP) in stabilising markets, keeping the supply of credit available and in warding off downward risks to inflation expectations following the onset of the crisis. The implementation of the PEPP was seen as key in transmitting an easing in the Bank's monetary policy stance by narrowing sovereign yield spreads across the euro area, in turn lowering borrowing costs for governments, businesses and households. Lane discussed that the ECB saw its response to the pandemic as consisting of two stages; the first was to address the immediate shock through an aggressive easing in monetary policy and the second, which is where it is currently, is to ensure policy settings remain calibrated to be consistent with inflation expectations converging back to its target, and it thus keeps on the table the option to make further adjustments as deemed necessary. The importance of fiscal policy in responding to the crisis was also emphasised and to that end, the announcements by the national governments in Germany and the Netherlands this week to extend the duration of their wage subsidy schemes would have been welcomed by the ECB.   



— — 

Switching to domestic events, updates on construction activity and capital expenditure for the June quarter were released by the ABS ahead of next week's national accounts, which are likely to report a sizeable contraction in GDP of around 6-7% to reflect the full scale of the impact of the national shutdown from late March to mid-May (preview here). Construction work done declined by a relatively modest 0.7% in the June quarter against an expected fall of 7.0% (see here). The ABS noted that with the construction sector being designated as an essential service, work was still able to progress around the social distancing restrictions. The surprise in the report was the composition of activity, with a sizeable decline in public sector works of 3.2% (-0.4%yr) while construction work by the private sector proved more resilient coming in flat at 0.1% (-2.2%yr), though the detail varied considerably. Engineering work lifted sharply rising by 8.6% in the quarter that appeared to be linked to increased levels of mining-related investment after several years of contraction. Meanwhile, the downturn in the residential construction cycle intensified as new home building contracted at an accelerated pace of 5.6%q/q to be down by 13.6% through the year — its sharpest rate of deterioration in nearly two decades. Commercial (non-residential) construction activity declined modestly in Q2 (-0.7%) but is likely to weaken further as firms cut back investment spending amid a weak and uncertain economic climate.

To this point, private sector capital expenditure fell by 5.9% in the June quarter to $26.13bn to its lowest level since Q3 2007 (see here), though a larger decline of 8.2% had been anticipated by markets. The emergence of the pandemic accelerated earlier weakness in investment in the non-mining sector falling by 8.0%q/q (-17.3%) and in the main this was driven by services industries (-8.4%q/q, -18.6%yr). Capital expenditure by the mining sector softened in the June quarter (-1.2%) but remained higher over the year, likely reflecting work on iron ore-related projects. In addition to the broad-based falls in actual capital expenditure, the report also contained significant downgrades for forward-looking investment plans. The 3rd estimate of total capital expenditure plans for 2020/21 put forward by domestic firms to the ABS during July and August was nominated at $98.6bn, indicating that investment was on track to decline by 12.6% compared with the same stage for the previous financial year. Three months earlier, capital expenditure plans pointed to a smaller year to year decline of 8.3%. The downgrades were led by the services industries, with capital expenditure now projected to fall by 20.4% over 2020/21 (from -18.7%), with manufacturing to also weaken at a faster pace of 11.8% (from -7.2%). Meanwhile, the projected upturn in the mining investment cycle flattened sharply to point to a 0.6% rise through 2020/21 from an implied 10.2% lift three months ago (see chart of the week, below).  

Chart of the week

Further context was provided to Q2's capital expenditure report through the ABS Business Impacts of COVID-19 survey for August (see here). The survey reported that nearly 1 in 4 firms had already reduced or planned to reduce capital expenditure plans compared to 3 months ago, with the most influential reason mentioned being due to uncertainty over future economic conditions.

Preview: Australian Q2 GDP

Australia's June quarter national accounts are due to be published by the ABS today at 11:30am (AEST). The onset of the pandemic and the containment measures implemented to limit the spread of the virus have driven the domestic economy into recession for the first time since the early 1990s. Following on from by a modest 0.3% decline in Q1 a historically large contraction in GDP will be recorded in the June quarter, expected to be in the order of 6%. 

In a global context, these outcomes, though extremely severe, are at the modest end of the scale. Australia's nationwide shutdown from late March to mid-May was less stringent and shorter in duration than experienced in many other regions, as government authorities were able to limit the initial outbreak of the virus to relatively low levels of infection. The effects of the shutdown were most pronounced in April as general mobility and economic activity across the nation was restricted. As a result, the labour market sustained its most severe shock in many decades with around 870k job losses occurring through April and May and hours worked falling by more than 10% over the period.



Following the National Cabinet agreeing to its three-stage RoadMap to a COVIDSafe Australia, restrictions gradually started to be unwound in most states from mid-May, facilitating a strong rebound in activity. Despite the dislocation in the labour market, the effects of an easing in the RBA's monetary policy stance and fiscal policy measures, including the JobKeeper (wage subsidy) scheme and enhanced unemployment assistance payments, helped to support household incomes and drive a rebound in retail spending and discretionary services. Surveyed measures of business confidence and trading conditions also lifted sharply from historic lows through this initial period of the reopening. Closer to the end of the June quarter, the reopening started to lose momentum as virus concerns returned in Victoria leading to restrictions being reinstated by the state government and this had spillover effects on confidence in the other states. 

As it stands | National Accounts — GDP


The emergence of the pandemic on Australian shores led to the first quarterly decline in national GDP in 9 years as the domestic economy contracted by 0.3% in the March quarter, slowing the annual pace to a post-GFC low of 1.4% from 2.2%, falling further below the nation's trend pace of growth of around 2.75%. Reflecting differences in the timing and severity of the initial outbreak of the virus, growth across OECD economies contracted at a faster pace falling by 1.8% in the March quarter, with notably sharper declines coming through in the euro area (-3.6%) and the UK (-2.2%), while the US economy contracted by 1.3%. China recorded a 10% decline in output in the March quarter after several major cities were shutdown in late January.




In Australia, precautionary behaviour preceded the tightening of activity restrictions and the eventual shutdown and this led to a significant shift in household consumption patterns. Areas of discretionary spending, such as dining out and recreational activities, were avoided and overseas and domestic travel was curtailed by border closures, while demand for groceries, other essentials and household goods soared in preparation for the shutdown. Activity in the housing market rolled over very sharply towards the end of the March quarter as public auctions and open house inspections were affected by social distancing restrictions, contributing to a slowing in the pace of price gains in the capital city markets.



Residential construction activity, already in the midst of a sharp downturn ahead of the onset of the pandemic, weakened further in Q1 as new home building continued to decline, while uncertainty over the outlook for housing demand became elevated in response to the impact of travel restrictions on net overseas migration, arrivals of visiting students and inbound tourism. Business investment remained weak through the March quarter and with the pandemic leading to a collapse in measures of confidence and trading conditions, the outlook for capital expenditure plans over the coming financial year deteriorated sharply. 

Key dynamics in Q2 | National Accounts 
— GDP 

Household consumption — In April, household spending fell sharply amid the national shutdown as consumer sentiment plunged to historic lows. Despite the period of severe dislocation in the labour market, the reopening in mid-May saw retail spending rebound strongly and this continued into July supported by measures introduced by the Federal Government to support household incomes, including through the JobKeeper policy, enhanced assistance payments and early access to superannuation accounts, while lenders have also allowed borrowers to temporarily defer repayments on mortgages. Ongoing restrictions, such as those imposed on travel, and cautionary behaviour has resulted in the pattern 
of household spending shifting markedly away from services to more goods-related consumption, with an increasing share of purchases being made through online channels.    


Dwelling investment — The downturn in the residential construction cycle intensified in the June quarter as private sector activity contracted by a further 5.6% to be down by 12.1% through the year. New home building fell by 5.6% in Q2 to slide to its lowest level in 5
½ years, while alteration work rolled over (-5.7%) after increasing over recent quarters.   


Business investment — The tightening of pandemic containment measures, weakening economic conditions and elevated uncertainty over the outlook accelerated weakness in private sector capital expenditure as it contracted by 5.9% in Q2 
 its 6th consecutive quarterly decline. Forward-looking investment plans were also downgraded.   


Public demand — Government spending ramped up by 2.9%in Q2, with a key focus in health-related areas as the pandemic intensified.


Inventories — Weak demand conditions through the shutdown combined with the disruption to operating conditions led to the sharpest quarterly contraction in inventories on record of -3.0%q/q.   

Net exports — The impact of travel restrictions had a significant impact on services exports halting the arrival of inbound tourists and students. With overseas travel by Australians prohibited, spending on import services collapsed by 50.5%. Weak domestic demand conditions has also weighed notably on imports of capital goods. 

Thursday, August 27, 2020

Uncertainty influencing firms' capex outlook

The monthly ABS Business Impacts of COVID-19 survey for August provided insights into the effects of the pandemic on Australian firms' cash flows and capital expenditure intentions. 

In terms of the impact of the pandemic on firms' revenue, the details in this survey showed improvement. In August, a lower percentage of firms (41%) reported that revenue had decreased over the past month compared with July (47%), while a larger share (38%) now said that revenue had stabilised than in the previous survey (32%). The share of firms reporting a revenue increase was unchanged from the previous survey at 16%. Looking ahead to September, the negative impact on revenue is expected to recede further to affect 28% of firms. For operating expenses, there was minimal change in August compared to July, while in September the broadening of the stabilisation is expected to continue. Another positive aspect was around employment, with a decreasing share of firms cutting back on staff, though the percentage of firms increasing employee numbers remains small.     

  Source: ABS 

The survey also examined the ability of firms to meet upcoming financial commitments over the next 3 months. Almost 1 in 4 (23%) of respondents said it would be "easy" to "very easy" to meet upcoming financial commitments, 39% said it would be "neither easy nor difficult", while 35% indicated they expected it would be "difficult" to "very difficult". Focusing on the firms expecting difficulty in meeting upcoming financial commitments, as the chart below shows, this is unsurprisingly more likely to fall in the industries that have been hardest hit by the pandemic led by accommodation and food services (71%), transport (includes air travel), postal and warehousing (56%) and arts and recreation (48%).   

 Source: ABS 

On capex, compared to 3 months earlier, 1 in 4 firms said that their level of spending had remained unchanged, while 23% reported that it had been lowered and only 12% reported an increase. The chart, below, indicates that the declines in actual or planned capex have been more prevalent in medium and large-sized firms.

Source: ABS

Giving greater context to the downgrades reported in investment plans in today's Q2 capex data, the August survey provided a summary of the factors that are most influencing firms' decisions in this area. The most significant factor being mentioned by firms was the uncertainty of future economic conditions (59%), followed by expectations for future demand (40%). More positively for capex plans, firms are factoring in the availability of government support measures, including the expanded instant asset write-off allowances. Specifically, in relation to the pandemic, 28% of firms said that capex plans had been altered over the past three months as a result of its emergence.  

Source: ABS

Wednesday, August 26, 2020

Australian Q2 CapEx -5.9%; 2020/21 investment plans $98.6bn

The deepening effects of the COVID-19 pandemic has led to an intensification of pre-existing weakness in capital expenditure (capex) by Australian firms. In the June quarter, total capex declined by 5.9% that centred on the services sector (-8.4%), while a weak and uncertain economic climate led to broad-based downgrades in investment plans for 2020/21.     

CapEx — Q2 | By the numbers
  • Private sector capex contracted by 5.9% in the June quarter to $26.13bn, with a much larger decline of 8.2% forecast, following on from a 2.1% fall in Q1 (revised from -1.6%). In annual terms, the pace of decline accelerated to -11.5% from -6.3%.
  • Equipment, plant and machinery capex fell 7.6% to $12.12bn to be down by 13.8% over the year — its weakest outcome in 6½ years
  • Buildings and structures capex declined by 4.4% in Q2 to $14.01bn to take it to -9.4% through the year from -7.6%. 

  • In the intentions component of today's report, firms' 3rd estimate of investment plans for 2020/21 came in at $98.624bn to point a year to year decline of 12.6%; deeper than the implied 8.3% fall indicated 3 months ago. 

CapEx — Q2 | The details

Long before the pandemic had arrived, capex by Australian firms was on a weakening trajectory. Its emergence late in the March quarter of 2020 significantly intensified those earlier effects as the domestic economy fell into recession for the first time since the early 1990s, leading to much more uncertain outlook for firms than usual.



As indicated in business and activity surveys in Australia and offshore, the impact of the pandemic has predominantly fallen on services industries and today's capex data was broadly in line with this theme. Non-mining capex declined to its lowest level since Q4 2013 falling by 8.0% in Q2 to $17.71bn (-17.3%yr) as firms cut back spending to focus on preserving liquidity through the initial phase of the crisis. Services industries capex plunged by 8.4% to $15.51bn (-18.6%) and capex by manufacturing firms rolled over after a positive Q1 to decline by 4.5% to $2.2bn (-7.0%yr). Capex in the mining sector softened in the June quarter by 1.2% to $8.42bn but remained higher over the year (3.9%).  


Weak economic conditions and a highly elevated level of uncertainty over when the impact of the pandemic may ease and how business conditions may look at that stage has understandably led to a downgrade in firms' investment intentions. During July and August, domestic firms reported their 3rd estimates of capex plans for 2020/21 to the ABS, which came in at $98.62bn. At this level, that implies capex is on track to fall by 12.6% over 2020/21 compared to the same estimate for 2019/20. That is a downgrade on the 2nd estimate for 2020/21 put forward 3 months ago that pointed to a year to year decline of 8.3%. However, given the uncertainties present, these estimates can really only be taken as a guide. 

The updated 3rd estimates for 2020/21 showed non-mining investment is now projected at $60.39bn, indicating a 19.4% fall through the year (from -17.3% 3 months ago), with services at $52.2bn (-20.4% from -18.7%) and manufacturing at $8.19bn (-11.8% from -7.2%). In Q1's capex report, mining investment had been projected to turn higher over 2020/21, but that has now been pared back from a 10.2% lift to just a 0.6% rise at $38.24bn. 

    
CapEx — Q2 | Insights

Amid an extremely challenging and uncertain economic climate, firms have responded to the pandemic by reducing capital expenditure and lowering forward-looking investment plans to accommodate a focus on making it to the other side of the crisis. Clearly, liquidity management is key in this environment and as a consequence, all but essential business investment has largely been shelved at this time. 

Preview: CapEx Q2

Australia's private sector capital expenditure report for the June quarter is due to be published by the ABS at 11:30am (AEST) today. The onset of the COVID-19 pandemic is expected to have led to a significant decline in business investment in Q2, while forward-looking capital expenditure plans are also likely to have fallen sharply with firms concentrating on maintaining liquidity amid weak economic conditions and a highly uncertain outlook.  

As it stands Capital Expenditure

Capex was weak ahead of the full impact of the pandemic falling by 1.6% in the March quarter — its fifth consecutive quarterly contraction — to a 10-year low of $27.964bn (-6.1%yr) (see here). The weak outcome in Q1 was broad based with equipment, plant and machinery declining by 2.3% to $13.265bn (-4.0%yr) and buildings and structures contracting by 1.1% to $14.699bn (-7.9%yr). 



The sector breakdown showed a contrasting mix with the early stages of the pandemic intensifying the weakness in non-mining sector capex through a 4% fall in Q1 to $19.435bn that centred on a sizeable pullback in investment from services industries (-5.2%qtr, -12.8%yr), though the manufacturing sector showed resilience to lift by 5.7% in Q1 (7.2%yr). Meanwhile, the unwind in the mining investment cycle was finally on track to turn after 6 consecutive years of decline after lifting by 4.2%q/q to $8.53bn (6.9%yr).


  
Notable was the weakening in capex intentions as firms revised their investment plans during the early stages of the pandemic. The 6th estimate of capex spending for 2019/20 declined by 3.8% to $115.4bn — an unusual occurrence that late into the estimates cycle. The 2nd estimate of plans in 2020/21 rolled over to point to a 7.9% fall through the year, whereas three months earlier estimate 1 had implied capex would rise by 8.2% in 2020/21. 

Market expectations Capital Expenditure

The median estimate according to Bloomberg for today's report is for capex to fall by 8.2% in the June quarter; near to the largest contraction in a single quarter on record, with individual forecasts situated between -15.0% and -5.0%. For the intentions component, no median estimate is put forward but capex plans for 2020/21 could come in around $95bn on the 3rd estimate, pointing to a year to year decline in the order of 16%.        

What to watch Capital Expenditure


Most of the attention centres on capex intentions in this report, with today's 3rd estimate of plans for 2020/21 to provide an indication of the extent to which firms are delaying or shelving investment amid weak economic conditions and the high degree of uncertainty over the outlook the pandemic has created. Business survey data has shown that the services industries have been hardest hit by these effects, while the manufacturing sector has been more resilient. In Australia's case, mining sector investment is a key consideration and though the effects of the pandemic appear to have been less severe than in other sectors of the economy, it may result in the projected increase in investment plans being pared back.


Tuesday, August 25, 2020

Australian construction activity -0.7% in Q2

Against expectations and despite the disruptions to the broader economy from pandemic containment measures, Australian construction activity declined only modestly overall in the June quarter with the ABS noting that the designation of the sector as an essential service allowed work to progress around the social distancing restrictions. 

Construction Work Done — Q2 | By the numbers

  • Total construction work done (private and public sectors) declined by 0.7% in the June quarter to $50.129bn, whereas the median estimate was for a significant fall of 7.0%. Activity in Q1 was revised higher to +0.7% from a 1% fall. In annual terms, the overall decline slowed to -2.2% from -4.4% (revised from -6.5%). 
  • The headline results were;  
    • Residential work -5.5%q/q to $16.643bn (-12.1%Y/Y)
    • Non-residential work -1.5%q/q to $11.774bn (+6.2%Y/Y)
    • Engineering work +3.8%q/q to $21.712bn (+2.2%Y/Y)


Construction Work Done — Q2 | The details 

The onset of the pandemic followed by the national shutdown from late March to early May had a relatively modest impact on the construction sector with activity falling by 1.1% over the first half of the year. But the outlook is another matter entirely given that weak economic conditions now ensue and uncertainty is highly elevated, meaning that firms could be more likely to delay or shelve planned projects.


The surprise in today's release was that activity in the private sector was more resilient than expected with a flat outcome in Q2 (0.1%) following a 1.2% increase (revised from -0.6%) in Q1, though that still left the level of work done down over the first half (-0.7%). Engineering work posted a strong 8.6% lift after rising by 2.1% in Q1, with much of this coming from New South Wales and Western Australia, the latter likely pointing to the effects of the mining investment cycle starting to turn higher. Against this, private building work contracted sharply in Q2 falling by 4% after a modest 0.8% lift in Q1, in which non-residential work softened (-0.7%) and the downturn in the residential construction cycle intensified (-5.6%).


New home building pulled back by a further 5.6% in Q2 to be down by 13.6% through the year, while alteration work fell by 5.7% as than annual pace swung from 4.6% to -1.1%.


In the public sector, construction activity declined by 2.5% over the first half as more accelerated weakness came through in Q2 (-3.2%) after a soft Q1 (-1.1%). This left the level of activity near-flat over the year (-0.4%). Public building works pulled back by 3.1% in Q2 (3.6%yr), while engineering work contracted by 3.3% (-1.9%yr). Governments in Australia have indicated that infrastructure projects will be fast-tracked and this will help to smooth the impacts of the ongoing downturn in the residential construction cycle and likely weakness in commercial work as the pandemic weighs of firms' investment plans.   

   
A summary of the state-based detail is provided in the table, below. As touched on earlier, the standout outcomes were the upturn in engineering work in New South Wales (8.8%) and in Western Australia (10.4%). Residential work is in mired in weakness across the nation and the effects of the pandemic through its impact on migration flows is likely to lengthen the duration of the downturn. Meanwhile, Victoria is likely to show a much more significant decline in Q3 as the most recent shutdown there has severely limited the number of workers permitted on sites. 


Construction Work Done — Q2 | Insights

The takeaway from today's report is that the impact of the initial phase of the pandemic and the containment measures that followed had a relatively modest impact on the construction sector, and this is backed up by the detailed labour force and payrolls data that have shown that job losses were much smaller than in several other industries. However, there are significant heads going forward, notably in residential and commercial construction due to weak economic conditions and elevated uncertainty, though engineering work is likely to provide some offset in public infrastructure projects and the projected upturn in the mining investment cycle after several years of decline.