Australian private sector capital expenditure contracted by 2.2% in Q3, with the Delta lockdowns disrupting the momentum of the earlier upswing. However, this looks to be a temporary setback with firms materially upgrading investment plans through the remainder of 2021/22.
CapEx — Q3 | By the numbers
- Private sector capex fell broadly as expected contracting by 2.2% to $32.7bn in Q3 (prior: 3.4%q/q revised from 4.4%q/q). Growth through the year lifted to 12.9% from 11.7% on base effects.
- Equipment, plant and machinery capex declined by 4.1%q/q to $15.8bn (prior: 2.7%q/q), easing growth over the year to 17.4% from 18.9%.
- Buildings and structures capex was broadly flat (-0.2%q/q) at $16.9bn in Q3 (prior: 4.2%q/q), to be up 9% over the year (from 5.5%).
- Forward-looking investment plans for 2021/22 increased to $138.6bn according to estimate 4, representing an upgrade of 8.7% on estimate 3, and are on track for a year-to-year rise of 19.7%.
CapEx — Q3 | The details
The rebound in Australia's capex cycle from the COVID recession suffered a setback in Q3 due to the Delta lockdowns. Capex was down 2.2% in Q3, its first quarterly fall in a year, but this weakness looks to be temporary in my assessment and the earlier momentum can be expected to re-establish itself in Q4 with locked down states opening up. As a result of Q3's contraction, capex fell back to $32.7bn to be broadly in line with pre-pandemic levels.
Unsurprisingly, the national decline in capex was driven by New South Wales in response to the Sydney lockdown, which restricted trading conditions and impacted construction work. Capex in the state was down 8.5% in the quarter, knocking around $0.9bn off the national aggregate. Victoria also experienced an extended lockdown in Q3, though capex there was down a relatively modest 1.6% for the period. The ACT lockdown led to a 16.7% contraction in capex, though it accounts for just a fraction of national capex.
Consistent with lockdown effects, the fall in Q3 capex was driven by the non-mining sector (-3.4%). Mining sector capex was resilient (1.2%) but it remains around the levels seen in recent years and is not expanding at any notable rate despite the surge in commodity prices.
Within the non-mining sector, equipment spending fell for the first time since Q3 2020, down 4.6% in Q3. This component has been the major impulse for the rebound in the capex cycle, so its progress has been setback by the Delta disruptions and it will deliver a significant hit to the Q3 GDP figures. There may have also been an element of supply chain disruptions coming through in the quarter. In particular, the monthly trade accounts have reported a sharp fall in auto imports as production has been hit by the global semiconductor shortage. Buildings and structures spending by the non-mining sector was down 1.9%q/q, reflecting the temporary suspension of construction work in Sydney.
Taking a look at capex across the broad sectors of the economy, both the goods-related (ex-mining) (-3.4%) and business services sectors (-5.5%) saw heavy falls in capex in Q3. The former was hit by a 14.6% contraction in retail capex in response to the closures that occured in the industry through the winter lockdowns, while the latter saw broad-based falls as spending was temporarily delayed and as many people were working from home. Household services capex was neutral (0.5%q/q) around varying lockdown effects. Other services capex fell 16.2%q/q and education and training was down 7.3%q/q but health care capex surged by 10.2%. Arts and recreation surprised (20.9%q/q), supported by the states not affected by lockdowns.
Turning to the forward-looking investment plans, the news here was positive and is the main reason why the weakness seen in Q3 appears to be a temporary setback. Expectations were for only a small upgrade in 2021/22 spending plans on the basis that firms may be delaying new investment amid the Delta lockdowns. However, in the preview, I put forward the view that there would be an upside surprise, with firms effectively upping investment plans through the remainder of the financial year as a response to an expected strong rebound in the economy and to make up for the disruptions in Q3.
This is what transpired with firms' 4th estimate of 2021/22 investment plans lifted by 8.7% on the previous estimate to $138.6bn. A comparison with the equivalent estimate for 2020/21 has capex on track for a 19.7% year-to-year rise. Looking into the details, non-mining investment plans were increased by 10.3% on estimate 3 to $96.8bn, the highest 4th estimate on record to be running 22.3% higher year to year. Within this, equipment spending plans lifted 15% on estimate 3 (26.3% year to year) and buildings and structures were advanced by 6% (18.5% year to year). Mining capex plans for 2021/22 were up 5.1% on estimate 3 and up 14.1% year to year, with upgrades of similar magnitudes seen for equipment and buildings and structures. Plans here may be accelerating due to the very strong global demand for commodities.
CapEx — Q3 | Insights
The rebound in the capex cycle was disrupted by the Delta lockdowns as overall business investment contracted broadly as expected in Q3 falling by 2.2%. The fall was centred in equipment spending (-4.1%q/q) and in the non-mining sector in particular (-4.6%q/q), which will result in a sizeable hit to quarterly GDP. However, this weakness should be temporary as investment plans for 2021/22 were upgraded sharply, consistent with the upbeat detail in recent business surveys. The resumption of the earlier rebound in capex, I expect, will be a key contributor to sustaining the economic expansion through 2022 as reopening effects fade.