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%).
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.
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.