Australian private sector capital expenditure expanded by a further 4.4% in the June quarter, rebounding to be 3% above pre-pandemic levels. The strong recovery in the domestic economy and tax incentives have turned the cycle in business investment from extended weakness prior to COVID and investment plans continue to be upgraded on the back of this. However, it remains to be seen the effect the emergence of the Delta variant will have on this momentum.
CapEx — Q2 | By the numbers
- Private sector capex was stronger than expected in Q2 rising by 4.4% against an estimated 2.5%, coming in at $32.7bn (11.5%Y/Y). This followed the 6.0% increase in Q1.
- Equipment, plant and machinery capex posted a 4.3% rise in the quarter to $15.8bn to be up by 17.3% through the year.
- Buildings and structures capex lifted by 4.6% — its fastest quarterly rise in more than 9 years — to $16.9bn (6.5%Y/Y).
- Forward-looking investment plans on firms' 3rd estimates for 2021/22 were upgraded by 12.5% on estimate 2 to $127.7bn and were 17.5% higher than year-ago levels.
CapEx — Q2 | The details
Strong momentum in business capex spending was maintained in the June quarter, rising by 4.4% following on from the rebounds in the previous two quarters of 3.0% (Q4) and 6.0% (Q1). Enhanced by base effects, annual growth in capex accelerated to 11.5% — a pace last seen during the unwind from the mining investment boom. At $32.7bn, quarterly capex was around 3% higher than the weak levels that prevailed prior to the onset of COVID.
Growth in capex in Q2 was driven almost exclusively by the non-mining sector (6.0%q/q) as mining investment remained subdued (0.4%q/q). Capex from the non-mining sector was $23.9bn in the quarter to be 2.6% higher than its pre-pandemic level at Q4 2019. The rebound continues to be driven by equipment spending (5.3%q/q) in response to the tax incentives available to businesses included the past couple of federal budgets, including instant asset write-offs and loss carry-back provisions. The strength and speed of Australia's economic rebound has encouraged businesses to invest to help meet rising demand. Buildings and structures capex in the non-mining sector saw its fastest quarterly rise (6.9%) in 6 years but was 5% below pre-pandemic levels.
Turning to the mining sector, capex posted a broadly flat outcome in Q2 (0.4%) at $8.8bn. Surging commodity prices have not had any noticeable effect on capex in the sector over the past year (2.2%). Buildings and structures capex was modestly higher in Q2 (0.8%) as equipment spending softened (-0.5%).
For the June report, Australian firms submitted their 3rd estimates of investment plans for 2021/22. These estimates were put through to the ABS during July and August as the concerns associated with the Delta variant were emerging, so some caution is warranted in assessing these outcomes. Plans for 2021/22 were nominated at $127.7bn, representing a 12.5% increase on the figure from 3 months ago and up 17.5% from last year when the economy was starting its recovery from the first wave of COVID. My forecast for the 3rd estimate was $120bn (+6% on est 2), expecting that plans may be being revised due to Delta. Today's outcome points to strength rather than resilience but whether that level of optimism holds up over the second half of the year remains to be seen. Business surveys have weakened considerably of late as economic conditions have deteriorated and uncertainty has ramped up — strong headwinds for the capex outlook.
Investment plans in the non-mining sector were elevated by 15.4% from estimate 2 to $87.9bn to be up almost 25% year to year. The underlying detail pointed to plans for equipment spending being on track for a year-to-year rise of 33.9% ($41.9bn) and buildings and structures gaining more momentum as the period progresses to lift 17.5% ($46bn). Plans in the mining sector were pointing to a 4.0% rise through 2021/22 ($39.8bn), indicating no material uplift despite high commodity prices, with modest rises in equipment (6.6%) and buildings and structures (3.0%).
CapEx — Q2 | Insights
An upbeat result for capex in Q2 as strong momentum continued in equipment spending with the domestic economy rebounding and supported by tax incentives to encourage business investment. Buildings and structures capex firmed but remains at low levels. Forward-looking capex plans were revised strongly higher for 2021/22. How durable the upturn in capex spending and investment plans will be to the setback in the economy associated with the Delta variant remains the key issue.
