Australian private sector capital expenditure weakened by more than expected falling by 3.0% in the September quarter as the pandemic continue to weigh on business investment and notably so in Victoria due to the reversal of the state's reopening. Firms' investment intentions for 2020/21 were upgraded from 3 months ago, but elevated uncertainty continues to set a challenging background.
CapEx — Q3 | By the numbers- Private sector capex contracted by 3.0% in the September quarter to $25.85bn, coming in weaker than the median estimate for a 1.5% decline, while Q2's initially reported fall of -5.9% was revised to -6.4%. In annual terms, the decline in capex extended to -13.8% from -11.7%.
- Equipment, plant and machinery capex contracted by 2.2% to $12.1bn to be 12.3% lower through the year (from -13.9%).
- Buildings and structures capex fell by 3.7%q/q to $13.8bn as the contraction in annual terms widened to -15.0% from -9.6%.
- For forward-looking investment plans, firms' 4th estimate for spending over 2020/21 came in at $104.98. This was 6.3% higher than the 3rd estimate put forward 3 months ago, but it points to capex falling by 10.3% when compared with the same estimate for 2019/20.
CapEx — Q3 | The details
Capital expenditure by Australian private sector firms had been weakening before the Covid-19 pandemic emerged and this has since been accelerated as firms have focused on preserving capital to make it through the initial phase of the crisis by cutting back or delaying all but essential investment spending. Furthermore, the onset of the pandemic has meant that the economic outlook has become much more uncertain than usual, and as a consequence firms are understandably reluctant to invest with such limited visibility over the future.
Capital expenditure by Australian private sector firms had been weakening before the Covid-19 pandemic emerged and this has since been accelerated as firms have focused on preserving capital to make it through the initial phase of the crisis by cutting back or delaying all but essential investment spending. Furthermore, the onset of the pandemic has meant that the economic outlook has become much more uncertain than usual, and as a consequence firms are understandably reluctant to invest with such limited visibility over the future.
At the sector level, the effects of the pandemic have been much more pronounced on capex by firms in services industries than by those in manufacturing and mining as the impact of the restrictions has hit them more directly. Total capex was down by 3.0% in Q3 falling to its lowest level since 2007 at $25.85bn. The reversal of Victoria's reopening had a marked impact (-7.7%q/q) accounting for roughly half of the decline in capex nationally for Q3. Capex by the non-mining sector weakened by 3.0% to a 13½-year low of $17.49bn, which incorporated a 3.3% contraction from the services industries to $15.27bn (-18.9%Y/Y) and a 1.0% slide in manufacturing investment to $2.22bn (-12.9%Y/Y). After a positive start to 2020, mining sector capex has declined over the past two quarters, though the level is down fairly modestly compared to a year earlier (-2.8%).
For forward-looking investment plans, Australian firms estimated total capex for the 2020/21 financial year to be around $105bn. This was the 4th estimate firms have put forward for the current financial year and this latest figure was 6.3% higher than the previous figure from 3 months ago ($98.7bn). There are a couple of factors at play here. A separate business survey conducted by the ABS last week found that the proportion of firms citing economic uncertainty as influencing capex decisions had decreased markedly from 59% in August to 29% by October, while policy support, including the provision in the recent Federal Budget that has expanded and lengthened access for firms to instant asset write-offs, has gained some traction, though modestly so at this stage.
Looking further into capex plans, non-mining capex intentions for 2020/21 have lifted by 14.1% from 3 months ago to around $69bn, which is driven by a 14.1% elevation in services capex plans to $59.8bn, while manufacturing investment plans were advanced by 13.9% to $9.4bn. Meanwhile, mining capex plans were dealt a downgrade of 5.8% on the previous estimate to $36bn. But as the chart below shows, investment plans across the economy are noticeably lower than they were a year earlier reflecting the effects of the pandemic; total capex -10.3%, non-mining -12.2% (services -13.2% and manuafacturing -4.9%) and mining -6.4%. These projected declines for 2020/21 compared with 2019/20 have scope to minimise if the recent strength in the recovery of the domestic economy is sustained, policy support gains more traction and if the pandemic remains under control.
CapEx — Q3 | Insights
Today's report continued to reflect the ongoing effects of the pandemic on business investment with spending being cut back to preserve liquidity and uncertainty around the economic outlook weighing on forward-looking intentions. Victoria's return to shutdown accentuated the weakness in capex in the quarter. The positives can be taken from the upgrades in the latest estimates for capex plans in 2020/21, though the outlook is still challenging.
