Australian private sector capital expenditure data for the June quarter is due for release this morning (11:30am AEST). The effects of the COVID recession intensified pre-existing weakness in capex prior to the pandemic, with firms putting off investment decisions amid heightened uncertainty and to preserve capital. A strong economic recovery and tax incentives had turned the cycle by early 2021, though the momentum now confronts significant headwinds associated with the outbreak of the Delta variant.
Growth in capex elevated to a 6.3% rise in the March quarter following on from a 4.2% increase in the final quarter of 2020. This brought capex to $31.5bn to be around 1% below pre-pandemic levels, which compared to a trough of -7% reached in the September quarter. Annual growth in capex turned positive on the result, from -7% to 0.8%.
Equipment spending was overwhelmingly driving this rise in capex on the back of tax incentives introduced in the 2020/21 Federal Budget, including instant asset write-off and loss carry-back provisions. After rebounding by 7.3% in Q4, equipment spending advanced by 9.1% in Q1 to be around 6% higher than pre-pandemic levels. Spending on buildings and structures was moving off its lows from the pandemic rising by 3.8% in the quarter but remained down over the year (-3.4%).
The non-mining sector was driving the upturn in capex with a 7.1%q/q rise extending the 6.2% lift in Q4. Goods-related industries (including manufacturing, construction and wholesalers) have been prominent rising 18.3% over the period while household (9.5%) and business services (8.5%) have also seen rebounds. Mining capex remained at subdued levels but lifted by 4.1% in Q1, driven mainly by equipment spending (8.1%q/q).
Businesses put through their 2nd estimates for capex spending in 2021/22 in the previous survey, nominating a figure of $113.6bn. This was a 7.9% upgrade on the 1st estimate ($105.3bn) and was running around 15% higher than investment plans from a year ago when projects were being shelved following the onset of the pandemic.
Market expectations | Capital Expenditure
For the June quarter, markets look for an overall rise in capex of 2.5% between estimates sitting at 0.8% to the low side and 4.5% on the high end. Today's survey will also include firms' 3rd estimate for investment plans in 2021/22. These estimates were submitted by firms to the ABS between July and August, coinciding with the emergence of the Delta variant. This could lead to a more cautious outlook given the uncertainty of the situation. Last year, estimate 3 was upgraded by 10% on estimate 2, whereas the average upgrade from the previous 5 years was around 15%. Assessments might be a little more cautious for 2021/22 given that uncertainty remains over the timeline to a sustained reopening whereas last year the worst of the pandemic looked to be in the past. My estimate is for an upgrade of 6%, taking estimate 3 to around the $120bn level.
For the June quarter, markets look for an overall rise in capex of 2.5% between estimates sitting at 0.8% to the low side and 4.5% on the high end. Today's survey will also include firms' 3rd estimate for investment plans in 2021/22. These estimates were submitted by firms to the ABS between July and August, coinciding with the emergence of the Delta variant. This could lead to a more cautious outlook given the uncertainty of the situation. Last year, estimate 3 was upgraded by 10% on estimate 2, whereas the average upgrade from the previous 5 years was around 15%. Assessments might be a little more cautious for 2021/22 given that uncertainty remains over the timeline to a sustained reopening whereas last year the worst of the pandemic looked to be in the past. My estimate is for an upgrade of 6%, taking estimate 3 to around the $120bn level.
Today's report is likely to be one to watch with some caution given the resurgence of the pandemic. Capex is expected to have shown further strength in Q2, but it remains to be seen how durable the momentum will be not only to the setback that the economy is now confronted with but also to a reopening that is uncertain in terms of its timing and restrictions that might persist. Investment plans over the near term could be weighed until some of this uncertainty is resolved.
