Australian housing finance continues its resurgence in January

Australian housing finance commitments have reached a new record high in January, continuing their resurgence from late 2021. Rebounding activity in New South Wales and Victoria post the Delta lockdowns has been the key driver, with the investor segment surging.  

Housing Finance — January | By the numbers

• Housing finance commitments ($ value, ex-refinancing) came in stronger than expected posting a 2.6% rise in January (vs 2% expected) to $33.7bn to be 18.2% higher over the year. Commitments lifted by 4.4% in the prior month. 
• Owner-occupier commitments lifted by 1%m/m to $22.7bn, with annual growth slowing to 3.4%. 
• Investor commitments surged by 6.1% in the month to $11bn, resetting to a new record high and running around 68% above their year-ago level. 
• Refinancing activity pulled back by 8.6% to $14.3bn in January. 

Housing Finance — January | The details 

Housing finance has seen a resurgence over recent months after slowing following the closure of the HomeBuilder scheme and lockdown disruptions. The 2.6% lift in January took commitments to a new record high at $33.7bn. The investor segment was the main contributor, up 6.1% in January for its strongest month-on-month rise since May. Owner-occupier commitments also advanced by 1%m/m.

Surging investor commitments in New South Wales (9.8%) and Victoria (11.1%) drove the national increase to the segment in January, with both states reaccelerating after the Delta lockdowns (Q3 last year) paused their momentum. Investor commitments are at record highs in both states.   

In the owner-occupier segment, upgraders have driven the recent rebound as first home buyer and construction-related loans have largely moved sideways. The recovery in conditions from lockdown disruptions and the rise in housing prices — up by almost 21% over the year to February according to data released earlier today from CoreLogic — has supported upgrader activity. At the same time, this sharp rise in housing prices has likely contributed to the slowdown in first home buyer activity as affordability has become stretched. The construction-related area slowed following the closure of the HomeBuilder stimulus but now appears to be stabilising.      

The approvals data (by the number of loans approved) reflects this divergence in activity between upgraders and first home buyers, and in the constructed-related area post HomeBuilder. 

Refinancing commitments have fallen by almost 20% since reaching their recent peak in August at around $17.8bn. Declines have been around this magnitude in both the owner-occupier and investor segments from their peaks. However, refinancing still remains at elevated levels compared to pre-pandemic. 

Housing Finance — January | Insights

A post-lockdown rebound in New South Wales and Victoria continues to drive a resurgence in housing finance, led by the investor segment but with upgraders also contributing. Affordability concerns have slowed activity from first home buyers, while the construction-related segment looks to be levelling out after retracing from its HomeBuilder-driven peaks. 

RBA reaffirms patient stance

The RBA Board has left all monetary policy settings (cash rate target 0.1%, rate on ES balances 0%) unchanged at today's meeting, reaffirming its patient stance in light of the Ukraine war and uncertainty over the evolution of wage and inflation dynamics in Australia. 

Today's decision statement from Governor Philip Lowe highlighted the war in Ukraine as a "major new source of uncertainty" to the global economic recovery, which is seen adding upward pressure to inflation due to disrupted supply chains and surging energy prices. The observed effect has been a tightening in financial conditions, with bond yields and rate hike expectations lifting. 

Domestically, Governor Lowe outlined that the resilience of the economy was leading to a rebound in conditions from the Omicron wave and was supporting a tightening in the labour market, with rates of unemployment and underemployment at their lowest since 2008. Worker absences during the peak in January had led to a large fall in hours worked, though forward-looking indicators from job vacancies suggested the strength in labour demand would drive a rebound in activity.

In spite of the tightening in the labour market, wages growth was observed as being "...around the relatively low rates prevailing before the pandemic" following last week's Q4 Wage Price Index (WPI) data. The pace at which wage pressures emerge as unemployment falls further to historically low levels is a key unknown for the Board. Governor Lowe hinted that the Board would be looking at labour cost measures as a lead indicator for movements in the WPI.   

Pandemic-related supply constraints and high petrol prices are expected to keep putting upward pressure on inflation over the coming quarters before easing late in 2022 and into 2023. However, that forecast hinges on a fairly orderly resolution to supply constraints, something made considerably more uncertain by the surge in global energy prices.  

Governor Lowe's final paragraph reiterated that monetary policy was being kept accommodative to support the push towards full employment. The main message is that until there is more clarity over the build-up of wage pressures and the persistence of inflation, the Board will be patient in adjusting policy, leaving market pricing for at least 100bps of hikes in 2022 continuing to look well adrift. 

Australia Current Account $12.7bn in Q4; net exports -0.2ppt

Australia's current account surplus narrowed in the December quarter as export earnings were weighed by a decline in the iron ore price. Net exports are only a modest headwind to growth in the quarter. 

Balance of Payments  — Q4 | By the numbers

• Australia's current account surplus narrowed by $9.3bn to $12.7bn (vs $14.3bn expected). Q3's surplus was revised down from $23.9bn to $22bn. 

• The trade surplus narrowed by $6.4bn in the quarter to $31bn. Export earnings declined by 1.1% while import spending lifted by 4.9%.   
• The income deficit widened by $2.8bn as returns to foreign investors advanced, coming in at $17.5bn in Q4. 
• ABS reported that net exports will subtract 0.2ppt from GDP growth in Q4. 

Balance of Payments — Q4 | The details 

Australia's current account surplus remained elevated in Q4 despite pulling back to $12.7bn (around 2% of GDP) from $22bn (around 4% of GDP) in the previous quarter. This was driven by a narrowing in the quarterly trade surplus, from $37.4bn to $31bn. Import spending lifted by 4.9%q/q to $96.6bn, with higher prices due to supply chain pressures the driving factor. Export earnings declined by 1.1% in the quarter to $107.8bn, weighed by a lower iron ore price and softer offshore demand.  

In volume terms, export volumes fell by 1.5%q/q, reversing the previous quarter's rise. Exports were 12.8% below their pre-pandemic level. Declines were seen in both goods (-1.1%) and services (-4.6%) trade. The weakness in goods exports was driven by non-rural goods (-2.6%) as resources exports contracted in the quarter (-1.5%) and are also lower through the year (-3.5%). Although iron ore exports lifted slightly in Q4 (0.7%), this was more than offset by falls in other commodities: coal -4.9%, LNG -5.3% and metals -13.5%. Trade in rural exports continued to advance, reaching a new record high in the quarter as demand offshore for domestic produce remained strong. Services exports contracted by 4.6%q/q to be down 47% on its pre-pandemic level, hugely affected by the restrictions on travel into Australia. 

Import volumes were down 0.9% in the quarter and were 8.6% below pre-pandemic levels. Imports had fallen by 2.8% in the lockdown-affected Q3, indicating pressures in global supply chains remained a constraint. Goods imports fell by 0.4%, with consumption (-2.6%) and capital goods (-3.9%) contracting. Constraints in vehicle production amid semi-conductor shortages continued to hold back vehicle imports (-10.3%), weighing on consumption goods (charts below). Capital goods were weighed by machinery and industrial equipment (-7.3%), also affected by semi-conductor shortages.  

Although supply chain issues remained a headwind for imports, some improvement was seen in intermediate goods, rebounded from a weak Q3 with a 4% rise. Services imports continued to contract (-4.8%) amid the overseas travel ban and were 59% down on pre-pandemic levels. 

With exports (-1.5%) contracting by more than imports (-0.9%) in Q4, net exports will weigh on quarterly GDP. However, the 0.2ppt deduction expected by the ABS was significantly lower than the 1ppt drag expected by markets ahead of today's release.  

Balance of Payments — Q4 | Insights 

A retracement in the iron ore price from elevated levels pulled Australia's current account surplus back to around 2% of GDP in Q4. Weaker offshore demand for Australia's resources has weighed on exports. Imports are rebounding from the pandemic recession but were held back over the second half of the year (-3.6%) due to the Delta lockdowns and supply chain constraints.  

---

In the day's other release, the ABS reported the contribution to quarterly GDP from public demand will be broadly neutral in Q4.  

ABS Chart

Preview: RBA March meeting

A subdued update of wages growth last week should see the RBA reaffirming its patient stance by leaving all monetary policy settings unchanged at today’s meeting (decision due at 2:30PM AEDT). With the Australian economy rebounding strongly from the Omicron wave and underlying inflation only recently returning to the middle of the 2-3% target band for the first time in 7 years, the Board can keep its sights set on pressing for more progress towards full employment. 

At the February meeting, the Board announced an early end to its QE program in response to upgraded unemployment and inflation forecasts, with Governor Lowe subsequently saying in his Year Ahead speech that hiking rates in 2022 was a plausible scenario based on its revised outlook. However, in light of uncertainty around the evolution of wage-price dynamics, the RBA has repeated it is prepared to be patient by taking a data-dependent approach to policy.  

While underlying inflation is back at the midpoint of the target, it is assessed as being primarily driven by pandemic-related supply issues, while wages growth, identified as one of the guidepost posts for the inflation outlook, was only back around its pre-pandemic pace in Q4. All this points to the RBA retaining its patient stance today in the face of aggressive market pricing that has at least 100bps of hikes priced in over 2022.  

Since the February meeting, the international borders have reopened and remaining pandemic restrictions have been (or will soon be) eased, providing confidence to the Board that the domestic outlook is on track, though the flooding in south-east Queensland and northern New South Wales has been an unexpected setback. Offshore, the global outlook has been clouded by geopolitical turmoil and heightened volatility in financial markets.  

Australian Business Indicators Q4: Inventories 1.1%

The easing of the Delta lockdowns saw Australian business conditions rebounding strongly, with inventories, sales, company profits and wages all lifting in the December quarter. 

Business Indicators — Q4 | By the numbers 

• Inventories rebounded by 1.1%q/q to $171bn after falling by 1.7% in Q3. This was well ahead of consensus for a flat outcome and lifted through the year growth from 0.6% to 2.2%. 
• Company gross operating profits advanced by 2% in Q4 to $125.5bn to be up by 13% over the year. 
• Wages and salaries more than offset Q3's 0.8% fall, surging by 1.9% to $155.6bn (5.5%Y/Y). 
• Sales posted a reopening-driven 3.4% rebound, broadly reversing Q3's 3.5% contraction. 

Business Indicators — Q4 | The details

Australian business conditions rebounded strongly from the Delta lockdowns in Q3. Eased restrictions, the rollout of the vaccine and stimulus measures were all key factors. Sales were resurgent rising by 3.4% supported by a recovery in discretionary spending, while inventories lifted by more than expected from very low levels.  

Inventory levels were up 1.1% overall in the quarter. Wholesale (4.5%) and manufacturing (1%) were the key contributors, suggesting some improvement in global supply chain pressures, albeit with the latter still well below pre-pandemic levels. Both wholesale (4.6%) and manufacturing sales (0.8%) rebounded but fell short of reversing their declines in Q3.   

Retail inventories contracted sharply (-2.3%), consistent with the rebound in household spending as the shops reopened. Retail sales surged by 5.7% in the quarter, more than reversing Q3's fall (-4.5%). Hospitality industries were setback in Q3 and remain in recovery mode despite conditions rebounding in Q4. Both inventories (-3.3%) and sales (-10.5%) remain well down on pre-pandemic levels.  

Company profits were bolstered through the lockdowns by fiscal support (rising by 4% in Q3) and continued to advance as the affected states reopened (2% in Q4). This left aggregate company profits up 13% on a year ago. Adjusting for inventory valuation changes, company profits were up 2.7% in Q4, rising by almost 11% over the year. Non-mining sector profits drove the increase, surging by 9.1%q/q. Within the sector, the largest rises were in finance and insurance (77.3%), transport (26.6%), manufacturing (23.3%) and rental, hiring & real estate (19.2%). Mining sector profits weakened (-5.7%) with the iron price retracing from elevated levels. 

Wages and salaries rebounded by a very strong 1.9% in the quarter, consistent with the recovery in the labour market as employment and hours worked snapped back above pre-pandemic levels. Wages in hospitality (15.8%) and arts & recreation (16.7%) rebounded with the reopening of affected states and eased restrictions.  

Business Indicators — Q4 | Insights

Today's report confirmed a strong recovery in business conditions as the lockdown disruptions during the Delta wave cleared, with sales rebounding and profits continuing to rise. Inventories increased by more than expected and look likely add to quarterly GDP, though more restocking still needs to occur, particularly if sales stay robust. The recovery in the labour market was reflected in the increase in the wages bill in the quarter. 

Macro (Re)view (25/2) | Australian wages to reaffirm RBA patience

The Ukrainian crisis left markets stuck between geopolitical turmoil and hawkish central bank expectations this week. The effect of economic sanctions on Russia will need to be worked through, as will the implications of surging energy prices when inflation is already high.  

Australian wages growth was only slightly stronger in Q4... 

The pace of wages growth remained contained in the December quarter rising by 0.7% to be 2.3% higher over the year. A material tightening in the labour market post the Delta lockdowns contributed to a more broad-based lift in wages growth than in the previous quarter, though not enough pressure has built up to prompt the RBA to pivot away from its patient stance on rates at next week's meeting. 

Reopening effects and labour shortages helped lift wages growth in goods-related and household services industries, but the pace moderated in business services industries. As the labour market has tightened, upward pressure on wages is mainly coming through in the private sector (2.4%), and in particular where individual agreements are used. Increased churn caused by the pandemic, seeing many workers move between roles and industries, has pushed up incentives as firms look to retain staff. Private sector wages including bonuses advanced from 2.2% to 3%, its fastest since Q3 2019. Public sector wages growth lifted to 2.1% but remains below its pre-pandemic pace, held back by wage caps despite some easing in Q4. A full review of the Q4 Wage Price Index release is available here

Construction activity and business investment were softer than expected...

Inputs for construction activity and business investment ahead of next week's Q4 GDP data disappointed to the downside this week. However, resurgent household spending is expected to see the Australian economy rebound by around 3% in the quarter (previewed here). 

Construction work done declined by 0.4% in the quarter, defying expectations for a 2.5% rise (reviewed here). Pandemic-related restrictions on the sector in Victoria led to a sharp fall in activity there (-5.5%), while softness in some other states also weighed. Private sector residential construction declined by 3% in the quarter as restrictions and capacity constraints weighed on new home building (-1.9%) and alterations (-8.7%), holding up progress in working through what is a very large stimulus-boosted pipeline.

Indicators of business investment were patchy. The construction activity data showed weakness in private engineering work (-3.5%), which looks mainly attributable to the restrictions in Victoria, though non-residential construction provided some offset (0.8%). Private sector capital expenditure broadly reversed Q3's lockdown-induced fall but the rebound was softer than expected at 1.1% in Q4 (reviewed here). The internals of the report showed that weakness in equipment spending (-0.1%) weighed, due to residual lockdowns effects and global supply chain constraints. Looking beyond the pandemic, firms' forward-looking investment plans were upgraded and look constructive. Expected capex spending in 2021/22 was lifted by 1.6% to $140.7bn, while the initial estimate of spending in 2022/23 was nominated at $116.7bn, its highest level since 2014/15. 

Fed narrative is largely unchanged...

For the Fed, communications and the price action indicate little has changed for the US central bank despite the events of the past week. Inflation on the Fed's preferred core PCE deflator pushed higher in January, rising from 4.9% to 5.1%yr. Goods continued to be the main driver of price pressures (8.8%yr); however, services inflation had also picked up (4.6%yr). Prior to the release, the Fed's Governor Waller said high inflation would keep a 50bps hike on the table at the March meeting; going on to express the view that a total of 100bps of hikes were needed "over the next several months". 

Data this week reaffirmed the strength of US consumer demand. Real personal spending rebounded from a fall in December with a stronger-than-expected 1.5% rise in January (5.4%yr). Underlying the rise was the sharpest month-on-month increase in real good spending (4.3%) since March 2021. With real services spending flat (0.1%m/m), it appears rotational effects in spending patterns were in play as Omicron surged early in the year. 

Inflation pressures continue in Europe...

January's annual headline inflation rate was confirmed at 5.1% in the euro area, while the core rate eased to 2.3%. Survey data indicates inflation pressures continued in February, even though supply constraints showed signs of easing. Rising wages in a tightening labour market and elevated energy prices have forced many firms to push these increases through to consumer prices, resulting in a large rise in average goods and services prices in February according to IHS Markit. The flash estimate of euro area activity lifted to a 5-month high as Omicron effects eased, with the composite PMI printing at a 55.8 reading. But, clearly, the geopolitical crisis in the region has clouded the outlook significantly. The ECB's Schnabel said in such a time of uncertainty, the central bank would "need to be a source of confidence and a reliable anchor for the economy". From a monetary policy perspective, and in light of inflation pressures, this meant maintaining its stated sequencing for normalisation. Schnabel said the 3 guideposts to this process were: forward guidance on the conditions needed to justify higher rates, a commitment to ending asset purchases before hiking rates, and to continue reinvesting maturing bonds for an "extended period" after the first hike. 

BoE tells markets not to get carried away... 

Bank of England officials appeared before the Treasury Committee this week, with Governor Bailey warning markets "not to get carried away" with aggressive rate hike expectations, highlighting there were downside risks to inflation if energy prices fell in line with futures pricing next year. Markets have at least 5 more hikes priced in for the rest of 2022: a path that would see an output gap starting to widen in 2024 according to Bank forecasts. 

Accordingly, a speech from MPC member Tenreyro outlined that monetary policy would need to balance the trade-off between containing high inflation and the risk of slowing the economy below its potential, and did not see the process of balance sheet reduction as having a large effect on the scale of tightening that will be required through this cycle. MPC member Ramsden, one of 4 members who voted for a larger 50bps rate hike earlier in the month, said it was important monetary policy acted to prevent second-round effects on inflation from the surge in energy prices.      

RBNZ's hawkishness leads to more tightening...

New Zealand's central bank this week reaffirmed its status as the most hawkish of its G10 peers, with the MPC not only announcing a 25bps rate hike (its third in succession) but also raising the projection for the policy rate to peak above 3% from around 2.5% previously and signalling its intention to conduct sales of its bond holdings from July. The Bank's latest Monetary Policy Statement noted that the increase in its policy rate projection was warranted in light of the risk of the upward drift in inflation expectations becoming entrenched into prices.    

RBNZ Chart (accessed here)

Preview: Australian Q4 GDP

Australia's December quarter national accounts are scheduled to be published by the ABS at 11:30am (AEDT) today. Following a large contraction in activity associated with the Delta lockdowns, the Australian economy rebounded strongly in Q4 as the affected states reopened. Restrictions started easing early in the quarter after vaccination rates met key thresholds, setting the recovery back on track. Fiscal stimulus played a key role during the lockdowns by supporting incomes and boosting savings, enabling household spending to drive the recovery on reopening. Estimates are for GDP to have rebounded by more than 3% in Q4.

Reflecting the effect of eased restrictions in Sydney and Melbourne, mobility indicators in the nation's two major capital cities recovered to higher levels than before the lockdowns. Meanwhile, average mobility across the other capitals was running well above pre-covid levels by the end of the year. 

With people able to get out and about more and consumer sentiment at strong levels bolstered by the vaccine rollout, visits to retail and recreational venues surged nationally in the lead-up to Christmas, reaching higher levels than 12 months earlier.        

This flowed through to a robust rebound in household discretionary spending, driving the economic recovery. Retail sales volumes increased at a record pace in Q4, with the strongest rebounds seen in clothing and footwear, department stores and cafes and restaurants. 

Strong sentiment, pent up demand and a high level of accumulated savings underpinned the rebound in household spending, while a tightening labour market was also key support. The national unemployment rate fell to a 13-year low in December at 4.2% and occured alongside a recovery in labour force participation to around record highs. Overall, both employment and hours worked rebounded above their pre-pandemic levels after a weak Q3.   

Activity in the Sydney and Melbourne housing markets rebounded in the quarter after being weighed by restrictions during the lockdowns; however, the pace of price gains slowed in both cities. Policy stimulus from the HomeBuilder scheme, government incentives and low rates had led to an elevated residential construction pipeline, though disruptions from lockdowns and capacity constraints had slowed the pace of activity over the second half of the year. Business investment rebounded from a weak Q3 but was patchy, with non-residential construction rising as equipment spending was soft. Net exports look likely to unwind their sizeable contribution to GDP in Q3. The economic recovery supported import spending, though global supply chain constraints remained a headwind. Exports earnings were boosted by rising LNG and Coal prices, even as the iron ore price retraced from elevated levels. 

As it stands | National Accounts — GDP

The return of lockdowns across large parts of the nation following the emergence of the Delta variant led to a 1.9% contraction in Australian GDP in the September quarter. The economy transitioned from the recovery to the expansion phase over the first half of the year, but the Delta setback saw GDP falling back below its pre-pandemic level. 

Offshore, the Delta variant was also a headwind, slowing quarterly GDP growth in OECD economies from 1.7% to 1.1% in Q3. The US economy slowed sharply to 0.6% in Q3 as household spending was weighed by rising virus caseloads, a fading fiscal impulse and supply chain pressures. Across the Atlantic, the euro area economy showed resilience to Delta as GDP firmed to 2.3% in the quarter, while in the UK output moderated to 1.1% after an easing in restrictions boosted Q2 GDP (5.4%). In Asia, regulatory measures to curb leverage and activity restrictions led to a slowdown in China's economy (0.7%), while in Japan GDP contracted (-0.9%) following a resurgence in the virus. 

In Australia, lockdowns were in place in New South Wales, Victoria and the ACT for much of Q3, driving a large fall in household consumption (-4.8%). Hardest hit by the restrictions were the services (-5.8%) and discretionary (-11.3%) categories, though goods consumption also contracted (-3.3%) as in-store retail in the affected states was largely shuttered. 

Alongside the decline in consumption, government income support measures were ramped up to similar levels seen at the outset of the pandemic, leading to a surge in the household saving ratio, from 11.8% to 19.8%.

The strong upswing underway in private investment was disrupted by the lockdowns, falling by 0.3% in Q3. Residential construction stalled (0.1%), with materials and labour shortages an additional constraint. Restrictions associated with the lockdowns temporarily weighed on activity in Australia's major housing markets in Sydney and Melbourne, with listings falling and price gains slowing. New business investment contracted by 1.1% in the quarter as many firms delayed spending on equipment and machinery (-3.1%). 

Both public demand and net exports contributed strongly to quarterly GDP, helping to attenuate some of the weakness in domestic demand conditions. Public spending (3.6%) was boosted by the pandemic response from governments as the rollout of the vaccine was accelerated. Meanwhile, resources exports rebounded from weather-related disruptions, driving a 1ppt contribution to growth from net exports, its largest contribution in 6 years. Import volumes fell in response to the lockdowns and global supply chain pressures, with the latter also causing inventories to be drawn down substantially in the quarter.

Key dynamics in Q4 | National Accounts — GDP 

Household consumption — Reopening from lockdowns and the increase in accumulated savings drove a sharp rebound in household spending. Accordingly, retail sales volumes rebounded by 8.2%, the strongest quarterly rise on record as discretionary demand for goods and services snapped back. Consumer sentiment was at strong levels over the quarter, reflecting confidence in the vaccine to mitigate the pandemic, increasing household wealth and the strength in the labour market.  

Dwelling investment — The upswing in the residential construction cycle lost momentum over the second half of the year, disrupted by lockdowns and materials and labour shortages. Private sector residential construction work contracted by 3% in Q4, with new home building down by 1.9% and alterations falling by 8.7%.

Business investment — Private sector capex rebounded by 1.1% in Q4 but was held back by weakness in equipment spending (-0.1%) on residual lockdown effects and global supply chain constraints.  

Public demand — A 0.4% contraction in Q4 will see public demand weighing modestly on GDP. Government spending stabilised in the quarter (0.1%) and remained at a high level, supported by the pandemic response. Underlying public investment declined in the quarter (-2.2%) but is bolstered by a large pipeline of projects.      

Inventories — Some improvement in global supply chain pressures assisted businesses in restocking inventories over the quarter from low levels. Inventories likely added around 1ppt to quarterly GDP. 

Net exports — Export volumes fell by 1.5% in Q4, weighed by a contraction in resources shipments. Global supply chain constraints remained a headwind to imports (-0.9%). Overall, net exports will subtract 0.2ppt from quarterly GDP. 

Australian Capex 1.1% in Q4; 2021/22 investment plans $140.7bn

Australian private sector capital expenditure rebounded in the December quarter but at a weaker pace than anticipated as residual lockdown effects and supply chain pressures weighed on equipment spending. Forward-looking investment plans in 2021/22 were upgraded, while year-ahead plans were higher than they have been in many years as firms look beyond the pandemic. 

CapEx — Q4 | By the numbers

• Private sector capex rebounded by 1.1% in Q4 to $33.3bn (9.8%Y/Y), broadly reversing the 1.1% decline in Q3 but coming in lower than the 2.5% rise forecast.

• Equipment, plant and machinery capex eased lower by 0.1% to $15.9bn (8.4%Y/Y), coming on the back of a sharp fall in Q3 (-3.3%).  

• Buildings and structures capex lifted by 2.2% to $17.4bn to be 11.2% higher through the year. 

• Firms' 5th estimate of capex plans in 2021/22 was upgraded by 1.6% to $140.7bn, pointing to a year-to-year rise of 15.9%. Meanwhile, the 1st estimate of year-ahead plans was nominated at $116.7bn, its highest since 2014/15.  

CapEx — Q4 | The details

The upturn in Australia's capex cycle generated by the economic recovery from the pandemic recession stalled over the second half of the year as lockdowns returned and pressures in global supply chains weighed on equipment spending. In the first half of the year, capex surged by 9.9% before stalling (0%) over the back half. Lockdowns during the Delta wave drove a 1.1% fall in Q3, which then rebounded at a slower-than-expected pace in Q4 following the reopening of affected states. Overall, this left capex at $33.3bn, equating to a 2.3% rise on its pre-pandemic level.  

Driving the second half weakness in capex was equipment spending, which contracted by 3.5% in the period compared to a 12.3% surge in the first half. Government tax incentives, accommodative financing conditions and the broader recovery in the economy supported the first half surge before it gave way amid the headwinds from lockdowns and supply chain pressures in the second half. 

Non-mining capex was unable to rebound from Q3's fall (-3.6%) coming in broadly flat in Q4 (0.3%), while in the mining sector equipment spending declined for a third consecutive quarter (-2.3%). As the economy weakened with much of the nation returning to lockdown in Q3, demand conditions were hit hard leading to firms delaying equipment spending. The international trade figures for imports of consumption and capital goods were weak over Q4, indicating that supply chain pressures also contributed to holding back business investment. In particular, weakness in vehicle (-10.2%) and industrial equipment (-5%) spending intensified over the quarter, pointing to the effect of the global semi-conductor shortage.   

   

Accordingly, the weakness in equipment spending showed up in goods-related (-0.9%) and business services (-2.9%) industries. In the goods-related area, weakness in wholesale trade was the driver (-6.6%) as it includes categories such as heavy farm machinery and warehouse equipment. Business services equipment was hit by weakness in professional services (-15.3%), potentially due to shortages of IT equipment; rental, hiring and real estate also declined (-2.4%), with this category including vehicle hire services that have struggled to rebuild fleets.   

In contrast to falling equipment spending, buildings and structures capex lifted over the second half (3.3%) despite restrictions in the construction sector. This is consistent with yesterday's construction activity data (see here) that reported non-residential construction picked up pace over the back half.   

Turning to investment plans, firms upgraded expected spending in 2021/22 by 1.6% on the estimate put forward 3 months earlier to $140.7bn. This increase was in line with historical upgrades from estimates 4 to 5 but weaker than I had anticipated ($145bn). Overall, this suggested capex is on track for a 15.9% rise compared with 2020/21. Non-mining capex plans were lifted by 1.7% to $98.1bn, centred on a rebound in equipment spending as the supply issues clear (3.5%). Mining capex plans were revised up by 1.2% to $42.7bn.

Year-ahead plans in 2022/23 were estimated at $116.7bn. Although there is a large degree of uncertainty around the evolution of these plans, this was the strongest 1st estimate for total capex since 2014/15. 

CapEx — Q4 | Insights

Lockdown and supply chain disruptions held back equipment spending over the second half of 2021, weighing on business investment. However, there has been some offset from non-residential construction. As the economy rebounds to its pre-Delta momentum and supply chain pressure ease, equipment spending should regain its momentum, bolstered by the support of government tax incentives and accommodative financing conditions. Forward-looking investment plans continue to improve, indicating many firms are optimistic about the economic outlook beyond the pandemic.