Australian private sector capital expenditure outperformed the top end of the range of market forecasts rising by 6.3% for the March quarter. This is being driven by very strong growth in equipment spending, which is supported by the tax incentives in last year's Federal Budget. Forward-looking investment plans were also upgraded with firms becoming more constructive over the economic outlook.
CapEx — Q1 | By the numbers
CapEx — Q1 | The details
- Private sector capex exceeded all estimates in lifting by 6.3% in the March quarter to $31.5bn. Markets had only expected a 2.1% rise, while growth in Q4 was left unrevised at 4.2%. Through the year growth in capex lifted to 0.8% from -7.0% on base effects.
- Equipment, plant and machinery capex surged by another 9.1% in Q1 from growth of 7.3% in Q4 to $15.3bn (5.6%Y/Y).
- Buildings and structures capex increased by 3.8% in Q1 (prior: 1.6% in Q4) to $16.2bn but is still down by 3.4% through the year.
- Forward-looking investment plans on firms' 6th estimate for 2020/21 were upgraded by 2.2% to $124bn, though this is 1.4% lower than at the comparable stage in 2019/20. Meanwhile, estimate 2 for 2021/22 was lifted by 7.9% to $113.6bn, with base effects going back to the start of the pandemic resulting in this figure being 14.9% higher than the estimate put forward 12 months ago.
The rebound in capex continued into the March quarter with firms becoming increasingly confident in the outlook with fewer restrictions on trade and the tax incentives included in last year's Federal Budget spurring demand. The 6.3% lift in capex in Q1 was the strongest in 9 years going back to the time of the mining investment boom.
The non-mining sector is driving the rebound with capex rising by a further 7.1% in Q1 after a 6.2% lift in Q4. This takes non-mining capex to back around its pre-pandemic level. Within the sector, equipment spending is on a tear rising by 17.1% from the lows of last year, helped by the greatly expanded asset write-off provisions available. Investment in buildings and structures has seen a more modest rebound, rising by 1.7% in Q4 and then 4.5% for Q1. Mining sector capex saw a 4.1% lift in Q1, driven by an 8.1% rise in equipment spending with support from a 2.6% increase in buildings and structures.
From an industry perspective, the full breakdown is shown in the 'By the numbers' section. This discussion will focus on the broad sector perspective. Aside from the mining sector covered above, capex in the goods-related (ex-mining) sector led the way with a 10.4% boost in Q1. The industries driving this were construction (17%qtr), manufacturing (15.4%qtr) and wholesalers (13.2%qtr). Business services capex advanced by 4.8% for the quarter, though it was a mixed picture in the sector with finance and insurance (17.6%qtr) and professional services (9.6%qtr) up sharply, moderated by declines from administration (-5.1%qtr) and telecommunications (-2.1%qtr). Household services capex lifted by 1.6%qtr, driven by reopening dynamics, with rises in arts and recreation (17.3%) and accommodation and food (8.8%qtr).
Turning to investment plans, estimate 6 for the year 2020/21 was nominated at $124bn, which was in line with my expectations. This figure is 2.2% higher than the total firms had put forward 3 months ago, though it also implies that capex for 2020/21 is on track to fall by 1.4% compared to 2019/20.
The report also included the 2nd estimate of capex plans for 2021/22. A year ago, the intensification of the pandemic crisis saw the 2nd estimate for 2020/21 cut by 9.4% compared to the 1st estimate as the uncertainty over the outlook and a focus on preserving capital took hold. But the strength of the recovery, surging business confidence and considerably less uncertainty around prospects for the economy in general means that firms are now positioning for growth. With this in mind, my expectation was that estimate 2 for 2021/22 would be upgraded by around 9%, reversing the fall that was seen last year. In the end, the scale of the upgrade got close but fell a little short, rising by 7.9% to $113.6bn. Within this, non-mining investment plans lifted by 11.3% to around $77bn to be broadly in line with their pre-pandemic level, while capex intentions for mining were revised up by 1.5% to $10.3bn.
CapEx — Q1 | Insights
All in all, Q1's capex data was consistent with the strength of the economic recovery underway. Equipment spending is surging with activity in the economy rebounding from the depths of last year and the expanded asset write-off provisions for new investment are clearly gaining traction. This strength should now last a little longer given that the recent Federal Budget extended these provisions by 12 months. Investment intentions are now looking much more constructive, especially in the non-mining sector, and look to have recovered from their pandemic-induced slump.
