Australian economy resilient in Q1

The Australian economy expanded by a stronger-than-expected 0.8% in the March quarter (vs 0.7% expected) in a resilient showing amid disruptions from the Omicron wave of the pandemic and severe wet weather and flooding across New South Wales and Queensland. These disruptions led to a 0.9% fall in hours worked in the quarter. Real GDP expanded by 3.3% through the year and is now 4.5% above its pre-Covid level at the end of 2019. 

Household consumption advanced by 1.5% in the quarter to drive economic growth. Rising inflation has seen real disposable income being squeezed over the past couple of quarters, contributing to a weakening in consumer sentiment. Despite this, household consumption remains been robust, now 2.5% above its pre-Covid level. Notably, it was discretionary demand (4.3%) that drove consumption growth, defying the fall in sentiment and real incomes. Consumption was funded out of accumulated savings, with the household saving ratio lowered by 2ppts to 11.4%, a still very elevated level. 

The other major theme was a rotation from goods (0.3%q/q) to services (2.3%) consumption, which mainly reflects the wider reopening of the economy, with Covid restrictions continuing to ease, notably boosting travel-related spending. 

Alongside household consumption, public demand and inventories contributed strongly to growth. Public demand (2.6%q/q) was driven by spending associated with the flood recovery effort. Inventories added 1ppt to GDP in the quarter as retail inventories surged, indicating some easing of supply chain pressures.

Business investment is regaining momentum (1.4%q/q) after its upswing during the initial phase of the recovery was paused by the Delta lockdowns. This was driven by machinery and equipment spending (3.2%), with non-dwelling construction held back by supply issues and wet weather. These headwinds saw activity in the residential construction sector slow further in the quarter (-1%). 

Net exports subtracted 1.7ppts from GDP as exports declined (-0.9%q/q), reflecting the hit to production in the resources and rural sectors from the wet weather. Imports accelerated (8.1%q/q) from weakness over the second half of last year. Easing input shortages supported rebounds in vehicle and machinery imports. 

    

Meanwhile, the terms of trade reset to a new record high after rising by 5.9% in the quarter as the war in Ukraine pushed up Australia's export commodity prices. This drove a 3.7%q/q rise in national income. Inflation pressures continued to build: the household consumption deflator broke out by 1.6% in the quarter to 3.2% through the year, its fastest since the previous period of high inflation back in 2008.

Link to the full review here 

Australian dwelling approvals down 2.4% in April

Australian dwelling approvals declined further in April, driven by the higher density segment. House approvals steadied in the month and may be finding a base after retracing from their stimulus-driven peak in 2021. 

Building Approvals — April | By the numbers

• National dwelling approvals (seasonally adjusted) fell by 2.4% in April to 14,908, missing expectations for a 2% rise. March approvals were revised to show a larger fall of 19.2%, from -18.5% initially reported. Approvals are now 32.4% lower over the year.  

• House approvals steadied with a 0.4% increase to 10,154 (-33.7%yr) after falling by 4.1% in March. 

• Unit approvals extended March's 38.3% decline falling by a further 7.9% in April to 4,755 (-29.5%yr)

Building Approvals — April | The details 

National dwelling approvals were down 2.4% in the month of April coming on the back of a steep decline in March (-19.2%). Approvals have been highly volatile in 2022 with some very large month-on-month movements. Taking a 3-month average to smooth out the volatility, approvals appear to be steading around the 16,000 level. This compares with the recent peak of around 22,000, boosted by the HomeBuilder program and other stimulus measures during the Covid period. The 3-month average measures suggest detached approvals may have based, while higher density approvals are down from their peak and tracking sideways. 

Across the states, there were largely offsetting moves in approvals in the month in New South Wales (-6.8%) and Victoria (7.8%). Both Queensland (-4.5%) and Western Australia (-0.3%) weakened after rising in March. Rebounds were posted in South Australia (50.3%) and Tasmania (10.6%).  

Alteration approvals lifted by 6.6% to around $1bn. Although the HomeBuilder subsidy concluded in mid-April 2021, alteration approvals have stayed at elevated levels, likely due to escalating materials and labour costs pushing up the price of renovations.   

Building Approvals — April | Insights  

After declining by around 5% over the first quarter, dwelling approvals saw further weakness with a 2.4% decline coming through in April. Aside from a weak reading in January, house approvals have held in the 10-11k range over the past 8 months. Higher density approvals have been highly volatile over recent months, making it difficult to draw conclusions. Following the elevation in approvals between mid-2020 to mid-2021, the focus is now on the completion of work in the pipeline, which is running up against capacity constraints in the construction sector.  

Australia Current Account $7.5bn in Q1; net exports -1.7ppts

Australia posted another current account surplus in the March quarter, as elevated commodity prices continued to boost national income. Net exports will weigh heavily on Q1 GDP growth as exports were disrupted by adverse weather, while imports regained momentum from recent supply pressures. 

Balance of Payments  — Q1 | By the numbers

• Australia's current account surplus narrowed by $5.7bn to $7.5bn, whereas it was forecast to rise to $13.3bn. The surplus from Q4 was revised up to $13.2bn from $12.7bn.

• The quarterly trade surplus narrowed by $0.9bn to $28.2bn. An 11.9% rise in import spending outpaced an 8.7% lift in export earnings.    
• The income deficit widened by $4.9bn with higher returns flowing to foreign investors, coming in at $20bn. 
• ABS reports that net exports will deduct 1.7ppts Q1 GDP growth. 

Balance of Payments — Q1 | The details 

For the 12th consecutive quarter, Australia has posted a surplus on current account. Q1's $7.5bn surplus is down from the elevated peaks seen over the pandemic, now around where it was in March 2020. Compared to Q4, the current account surplus narrowed by $5.7bn, with a widening income deficit the major driver (-$4.9bn) and the remainder coming from a decline in the trade surplus (-$0.9bn).  

Turning to quarterly trade volumes (adjusted for price movements), exports contracted by 0.9%q/q to be 4.2% lower over the year. Looking through the large decline in volatile non-monetary gold, the main factors were lower resources (-2.2%) and rural goods (-2%) exports, likely reflecting weakness in production associated with the severe wet weather in the quarter. With border restrictions easing, services exports (2.3%) commenced their recovery. 

Imports regained momentum after a weak back half of 2021, hit by lockdowns and supply constraints. Volumes advanced by 8.1% in Q1, to be up by 7.6% through the year. Consumption goods surged by 14.1%, with household electrical goods (30.5%) and non-industrial transport equipment (essentially road vehicles) (32.1%) soaring. This indicates supply issues eased up in the quarter, consistent with the signals in today's Business Indicators data (see here). 

Capital goods (5%q/q) rebounded from a sizeable contraction in Q4, turning around on a strong inflow of machinery and industrial equipment (12.5%) that was delayed over the second half of 2021. Intermediate goods were up by around 5% for the second quarter in succession. The key contributor has been processed industrial supplies, up 30.2% over the past two quarters, note this category has been boosted by pandemic-related spending on vaccines and R.A.T tests etc. Services imports lifted by 6.8%q/q as overseas travel resumed. 

Overall, with export volumes contracting (-0.9%q/q) and imports accelerating (8.1%q/q), the ABS reported net exports will deduct a sizeable 1.7ppts from GDP growth in Q1. While this will be a historically large negative contribution to GDP, it mostly reflects good news in terms of imports regaining momentum as supply constraints eased, helping inventories to be rebuilt. Wet weather weighed on exports, but volumes here will rebound, and in any case export earnings surged due to higher commodity prices.   

Balance of Payments — Q1 | Insights 

Elevated commodity prices have kept the nation's current account in surplus, to the tune of $7.5bn in the first quarter. The nation's terms of trade were up in the order of 6% in Q1 despite export volumes declining, held back by wet weather. Imports regained momentum and will help to meet robust domestic demand over the course of 2022.   

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The ABS also published quarterly Government Finance statistics today. The report confirmed a rebound in public demand after a soft Q4. Public demand lifted by 2.5% in the quarter, with expenditure rising by 2.7% and underlying investment up by 1.6%. Overall, the ABS reports a 0.7ppt contribution to GDP growth came through from public demand in Q1. 

ABS Chart

Australian Business Indicators Q1: Inventories 3.2%

Resilient demand amid the headwinds from Omicron, floods on the east coast and a pick up in inflation underpinned business conditions for Australian firms in the March quarter. An easing of supply pressures boosted inventories back to pre-pandemic levels.  

Business Indicators — Q1 | By the numbers 

• Inventories expanded by 3.2% in Q1 to $177bn, well above the consensus forecast (0.7%). This follows the 1.5% rise in the previous quarter. 
• Company gross operating profits lifted by 10.2% over the quarter (vs 5% exp) to $140.4bn, to be up by 25.3% through the year. 
• Wages and salaries increased by 1.8%q/q to $158.4bn (5.2%Y/Y)
• Sales were up by a solid 1% in Q1 after the reopening rebound in Q4 (3.6%). Annual growth in sales moderated to 2.4% from 3.6%. 

Business Indicators — Q1 | The details

Amid the disruptions during the quarter from the Omicron wave and floods on the east coast, business conditions showed resilience in the March quarter as demand held up. Sales lifted by 1% in the quarter, with wholesalers (3.1%) and the transport sector (6%) the largest contributors indicating some easing of supply pressures, as well as reflecting the easing of travel restrictions for the latter. Hospitality (3.6%) and retail sales (0.9%) expanded further from their reopening driven rebounds post the Delta lockdowns as more pent-up demand came through.

Alongside rising sales came a further rebuild in inventories, which have recovered to their pre-pandemic levels. Throughout the Covid period, supply chain pressures and input shortages have left firms sitting on low levels of inventories, in turn contributing to inflation pressures. The rebuild in inventories over the past two quarters (up 4.8% over the period) suggests an easing of supply constraints. Inventories are now back to pre-pandemic levels for retailers (+0.3%) and manufacturers (+0.6%) and well above for wholesalers (+7.1%). There is still a shortfall in the hospitality sector (-1.5%), which is still in the process of rebuilding capacity after the easing of border restrictions. 

Company profits lifted by 10.2% in the quarter and by 5.6% if adjusted for inventory valuations. Gross mining sector profits surged by 25.3% on the back of the acceleration in commodity prices following the war in Ukraine. Non-mining sector profits declined overall (-1.8%q/q), with margins likely under some pressure from rising input costs, including wages. 

The aggregate wages bill was up 1.8% over the quarter and was 5.2% higher through the year. This was slightly lower than Q4's increase (2.1%), likely due to hours worked taking a hit from Omicron and the floods. Hiring expanded over the quarter and forward-looking indicators of demand suggest this will continue for some time.   

Business Indicators — Q1 | Insights

Consumer demand was robust over the first quarter despite the headwinds from Omicron, severe wet weather and rising prices. This backdrop meant it was a decent quarter for Australian businesses, though the non-mining sector did see some pressure on margins, albeit with profits still at high levels. Inventories surged, recovering to their pre-pandemic level with supply constraints easing, but this is ahead of the impact of China's lockdowns. This will have a positive impact on Q1 GDP, potentially contributing more than 1ppt to activity. Mining profits soared, with the acceleration in commodity prices also boosting the nation's terms of trade. On the back of all of this, hiring demand remains robust. 

Macro (Re)view (27/5) | Pushing ahead

Improved risk sentiment played out in equities this week and set the tone across markets. The US dollar lost some of its recent strength, with yields at the front end of the curve declining on the idea the Fed may be set to pause on rate hikes towards the end of the northern summer, a view strengthened by inflation easing from its peak.

Headwinds slowing global growth

Growth in the world's major economies is losing momentum, with May's flash PMIs down from April's readings in the US, UK and euro area and broadly unchanged in Japan. Purchasing power continued to be dented by high inflation and input prices remained around record levels across the G4 as the Ukraine war and China's lockdowns added to supply disruptions. The likely reshoring of supply chains in response to these and other events over the Covid period was a key area of discussion in Davos this week at the World Economic Forum. Firms are anticipated over the coming years to recalibrate their focus from efficiency to resiliency in their supply chains. 

S&P Global chart

Capacity constraints weighed on Q1 activity in Australia...

First quarter construction activity (-0.9%q/q) and business investment (-0.3%q/q) data in Australia disappointed to the downside of expectations this week, likely contributing to a subdued Q1 GDP outcome next Wednesday (previewed here). Construction work is being held back by supply constraints caused by labour and materials shortages, discussed in depth by the RBA's Luci Ellis in a speech this week. These issues are particularly pressing in residential construction where there remains a vast pipeline of houses that are yet to be constructed, though commercial construction, which had been picking up, has now lost some momentum as well. As these supply issues are resolved, construction work should regain momentum and support economic growth; however, cost escalations may see some of the work sitting in the pipeline being delayed. 

A disappointing aspect of this week's data was the soft outcome on equipment investment by the non-mining sector (-0.1%), which is yet to regain the strong momentum it had built up ahead of the Delta lockdowns. More encouraging was the strong upgrade made to business investment plans for 2022/23, which were lifted by 11.8% to $131bn, its strongest level since 2014/15. There is some risk plans could be pared back as global growth slows, but these concerns are not new and businesses were submitting their investment plans as these headwinds were intensifying through April and May. 

... but consumer spending remains strong 

April retail sales were posted at a 0.9% rise in the month, a more moderate pace than the gains through the first quarter of around 1.7% but still a solid outcome. Annual growth ticked up from 9.4% to 9.6%. Rising retail inflation has partly driven these increses, though demand has also been robust, helped by a further easing of Covid restrictions, a tightening labour market and accumulated savings. Household consumption should drive Q1 GDP and confirm that demand has been resilient to the fall in consumer sentiment.  

Also of note domestically this week was a speech by the RBA's Chris Kent, which emphasised rate hikes as the main tool in removing accommodative monetary policy. Although the runoff in the balance sheet will also play a role, Kent said it would be a "predictable and modest one". This is because the RBA has said it is not planning on sales of its bond holdings, implying a passive approach to QT.     

Fed set for a predictable path

Following the Fed's 50bps rate hike in May, the central message coming out of that meeting was that there were likely to 50bps hikes coming in June and July. This was reaffirmed in the minutes from the May meeting that were published this week. The need for further hikes reflected the FOMC's assessment that the underlying conditions in the economy were robust, with the 1.5% contraction in Q1 GDP reflecting temporary drags from inventories and trade associated with the global supply chain pressures. That view was backed up robust personal consumption data, with real spending rising by 0.7% in April, its strongest increase since January, with gains in both goods (1%) and services (0.5%). However, falling real incomes due to high inflation is seeing households increasingly draw on accumulated savings, with the personal saving rate declining to 4.4% in April from 5% in March.   

Assuming the FOMC hikes as expected over the next couple of meetings, the Atlanta Fed President Raphael Bostic raised the idea of then taking a pause post the Jackson Hole Symosium (25-27 August) where the theme is "Reassessing Constraints on the Economy and Policy". There was some encouraging news for the Fed on the inflation front, with its preferred core PCE deflator printing at 0.3%m/m for the 3rd consecutive month. These outcomes have seen the year-over-year pace ease to 4.9% in April compared to February's peak of 5.3%.

ECB to hike in July; exit negative rates in Q3

A blog post from ECB President Christine Lagarde effectively summed up the mood around the Governing Council was to end APP purchases "early in the third quarter" enabling the first rate hike to be announced at the late July meeting. That would lift the policy rate from -0.5% to -0.25%, and then the intention is to hike again in September, thus exiting from negative rates for the first time since 2014. President Lagarde outlined that the supply/demand imbalances in the global economy coming out of the Covid crisis, together with shocks such as the war in Ukraine and the return of lockdowns in China, had lifted measures of inflation expectations above the ECB's target and monetary policy needed to respond.  

RBNZ ramps up its hawkishness  

For the second meeting running, the RBNZ hiked rates by 50bps, the policy rate now standing at 2%. The summary of the meeting showed that the MPC agreed to keep "briskly lifting" rates to rein in inflation expectations and return inflation to its target band. The RBNZ has already delivered 175bps of hikes since October. The Bank's latest Monetary Policy Statement brought forward the timing and raised the projected peak for rates to 4% from 3.3% in the February Statement. The MPC's guidance is that as the economy returns to equilibrium, rates can be lowered to a more neutral level. 

Preview: Australian Q1 GDP

Australia's March quarter national accounts are scheduled for release at 11:30am (AEST) today. A strong rebound following reopenings from the Delta lockdowns put the economic expansion back on track in the December quarter and output is expected to have increased further in the March quarter. The median estimate is for real GDP to expand by 0.7% in Q1, which would be a resilient outcome amid the headwinds from the Omicron wave, the east coast floods and rising inflation pressures.   

The spread of the Omicron variant led to virus caseloads surging early in 2022. High levels of vaccination prevented the authorities from implementing the lockdowns and associated restrictions seen in earlier waves of the pandemic; however, isolation requirements and precautionary behaviour more generally weighed on economic activity. The severe wet weather events in New South Wales and Queensland, including major flooding, were another headwind. Accordingly, mobility indicators showed a slower recovery than in 2021 from their seasonal fall over the Christmas and new year period.  

Household spending proved resilient over the March quarter to sharply rising retail prices and weakening sentiment. Key factors supporting spending were the high level of accumulated savings held by households and rising labour incomes generated by a tightening labour market that has seen the unemployment rate falling below 4% for the first time since the 1970s. 

Retail sales volumes rose at a solid pace in the quarter (1.2%), driven by strong growth in the discretionary categories (2.9%). The ongoing reopening of states and the easing of border restrictions had supported services-related spending, with dining out consumption surging (8.3%), while strong rises in clothing and footwear (3.6%) and department stores (4.3%) indicated goods-related demand remained robust. 

National housing price gains moderated over the quarter to a little above 2% from around 4% in the December quarter. This was driven by a cooling of gains in the Sydney and Melbourne markets, though prices were still rising at a strong pace in some smaller capital city markets, including Brisbane and Adelaide. Residential construction ran up against further delays from wet weather and Omicron in addition to trade and materials shortages. 

Business investment softened in the quarter and was yet to regain the momentum it had generated ahead of the Delta lockdowns. Net exports subtracted heavily from activity in the quarter. Resources exports were affected by adverse weather conditions, though export earnings accelerated as key commodity prices surged following the Ukraine war. Import volumes lifted sharply despite higher prices, consistent with the strength in domestic demand. The easing of travel restrictions during the quarter enabled services trade to commence its recovery. 

As it stands | National Accounts — GDP

The reopenings of states from lockdowns during the Delta wave led to the economic expansion regaining momentum, with real GDP rising by 3.4% in the December quarter. This lifted Australian GDP to 3.4% above its pre-pandemic level at the end of 2019. 

In the global economy, activity lifted at a solid pace in the final quarter of 2021 despite the emergence of the Omicron variant. Rising household consumption was driving the recovery of economies supported by accommodative monetary policy, accumulated savings and tightening labour markets. Goods consumption remained substantially more elevated than services consumption and was adding to inflation pressures given ongoing constraints in global supply chains. In the quarter, GDP growth advanced by 1.2% in the OECD as output lifted pace in the US (1.7%), UK (1.3%) and Japan (1.1%). Growth in the euro area slowed (0.3%) after eased restrictions had boosted activity in Q3. Meanwhile, in China, output gained pace in Q4 (1.5%) after slowing in the prior quarter.   

December quarter GDP growth in Australia was driven by a resurgence in household consumption (6.3%) as New South Wales, Victoria and the ACT reopened from extended lockdowns. Services consumption rebounded by 6.3% as entertainment venues, restaurants and licensed premises reopened and some domestic travel resumed. Goods consumption also lifted by 6.3% as non-essential retailers resumed in-store trading. Although real disposable income fell in the quarter, households had built up savings during the lockdowns, which were partially drawn on to fund spending during the reopening phase. The household saving ratio fell from 19.8% to 13.6% as a result but was still at a high level going into 2022.   

Private investment was weak during the quarter falling by 1.2%. Residential construction activity (-2.2%) was held back by materials and labour shortages, delaying progress in completing the large pipeline of work. Business investment softened further (-0.3%) following Q3's contraction, with the lockdowns and supply chain pressures pausing the upswing seen during the first half of the year.

Public demand, a strong support to the economy over the Covid period, weakened in Q4 (-0.4%) as investment slowed. Inventories rebounded to contribute 0.9ppt to quarterly growth; the restocking needed to meet the post-lockdown recovery in demand. Net exports subtracted 0.2ppt from Q4 GDP, with exports (-1.5%) held back by constraints in the resources sector and imports falling (-0.9%) in response to supply chain pressures. 

Key dynamics in Q1 | National Accounts — GDP 

Household consumption — Supported by a further easing of restrictions, accumulated savings and a tightening labour market, household consumption lifted at a solid pace in the quarter. Households spending was resilient amid Omicron, floods and rising inflation, with discretionary demand robust despite weakening sentiment. 

Dwelling investment — Disruptions in the residential construction sector intensified in Q1 as the wet weather on the east coast and Omicron added to delays stemming from capacity constraints. Private sector residential work contracted by 1% in the quarter, with new home building down by 1.6%q/q. A partial rebound in the alterations segment (2.1%) provided some offset.   

Business investment — Private sector capex softened by 0.3% in the quarter, reflecting weakness in non-mining equipment investment (-0.1%) and capacity constraints holding back progress in the construction of new buildings and structures (-1.7%).

Public demand — Rebounded from a weak Q4 to rise by 2.5% in Q1. Both expenditure (2.7%) and investment (1.6%) advanced, bolstering the economy amid the disruptions to activity in the quarter.    

Inventories — An easing of global supply chain pressures supported a rebuilding of inventories back to pre-Covid levels. May add up to 1ppt to quarterly GDP.  

Net exports — Set to subtract 1.7ppts from Q1 GDP. Export volumes contracted by 0.9%q/q as both resource and rural goods production was affected by the severe wet weather events. Imports regained momentum accelerating by 8.1%q/q. Input shortages eased, boosting vehicle, electrical goods and machinery imports.

Australian Capex -0.3% in Q1; 2022/23 investment plans $131bn

Australian private sector capital expenditure softened against expectations in the March quarter, easing back from a reopening driven boost in the final quarter of 2021. Forward-looking investment plans for 2022/23 were upgraded sharply to $131bn, showing resilience amid an uncertain outlook. 

CapEx — Q1 | By the numbers

• Private sector capex declined by 0.3% in the March quarter to $33.6bn (4.5%Y/Y), disappointing expectations for a 1.3% rise, though the prior quarter's increase was revised higher, from 1.1% to 2.3%. 

• Equipment, plant and machinery capex posted a 1.2%q/q rise to $16.2bn (1.8%) on the back of strength in the mining sector.

• Buildings and structures capex declined by 1.7%q/q to come in at $17.3bn, up 7.1% through the year. 

• Firms' 6th estimate of capex plans in 2021/22 was upgraded by 1.4% to $142.8bn, in line with expectations and pointing to a year-to-year rise of 15.5%. 
• The 2nd estimate of year-ahead plans for 2022/23 was robust, upgraded by 11.8% to $131bn (vs my estimate of $125bn), its highest since 2014/15.  

CapEx — Q1 | The details

Capex softened in the March quarter (-0.3%) as the reopening rebound from the previous quarter (2.3%) was cycled. This eased capex to $33.6bn, up 2.9% on its subdued pre-Covid level.  

Total equipment investment expanded by 1.2% in the quarter, though this came entirely from the mining sector (7.7%) as equipment spending in the non-mining sector was broadly unchanged (-0.1%). Equipment investment has expanded at a strong pace over the Covid period, now 6.3% above its pre-pandemic level, supported by accommodative financing conditions and the tax incentives introduced by the federal government, with firms needing to invest to meet the increase in demand generated by the economic recovery. 

Q1's weakness in non-mining equipment investment was centred in household services (-9.8%), coming after the reopening boost in Q4 last year (6.5%). This reversal played out in the hospitality (-12.3%) and health care industries (-8.8%). 

Investment in buildings and structures was lower in the quarter (-1.7%), likely held back by the capacity constraints highlighted in yesterday's construction activity data (see here). Declines were seen in both the mining (-3.3%) and non-mining sectors (-0.6%). The recovery in investment in buildings and structures in the non-mining sector has been slow, still more than 8% down on its pre-Covid level. This period of underinvestment will need to be corrected, though rising construction costs due to materials and labour shortages is likely to restrict the pace at which this occurs. Spending on building and structures in the mining sector remains around its level from recent years, despite surging commodity prices.     

Turning to the investment plans component in the report, firms lifted their 6th estimate of plans for 2021/22 from $141bn to $143bn, a broadly expected outcome. This puts capex on track to rise by 15.5% compared to 2020/21. On current estimates, capex will lift by around 15% in the non-mining sector and by 17% in the mining sector on a year-to-year basis. 

 

Firms were also surveyed by the ABS (between April and May) for their 2nd estimate of investment plans for 2022/23. Encouragingly, despite the uncertainty around global growth prospects from rising interest rates, the war in Ukraine and China's lockdowns, the 2nd estimate was a strong result, rising to $131bn from $117bn in the first estimate, an upgrade of 11.8% and also up 15% from the equivalent estimate in 2021/22. At $131bn, this was the highest 2nd estimate of year-ahead investment plans since 2014/15. 

Investment plans in the non-mining sector for 2022/23 were lifted to $89bn (+13.3% vs est 1), with plans for both equipment and buildings and structures investment increased by around 13% (vs est 1). Mining investment plans were upgraded by 8.7% on estimate 1 to around $42bn. This included upgrades to both equipment (8%) and buildings and structures (9%) plans.    

CapEx — Q1 | Insights

A soft result for quarterly capex, particularly in non-mining sector equipment investment (-0.1%). However, the implications look broadly neutral for Q1 GDP. The positive was the strong upgrade to 2022/23 investment plans. The key is whether this can hold up as global and domestic growth slows and with inflation still high, in part due to factors that have already been a headwind for business investment from product and labour shortages. 

Preview: CapEx Q1

The March quarter private sector Australian capital expenditure survey is due for release at 11:30am (AEST) this morning. The upswing in business investment that emerged alongside the broader economic recovery stalled over the second half of last year, disrupted by global supply chain pressures and domestic lockdowns. Some momentum is expected to have been regained in the first quarter while forward-looking investment plans should remain solid. 

As it stands | Capital Expenditure

Capex lifted by 1.1% in the December quarter but was flat overall through the back half of the year, stalling the momentum of the upswing seen over the first half of 2021 (9.9%). Overall, capex was around 2% above its subdued pre-Covid level. 

Spending on buildings and structures lifted by 2.2% in the quarter to be up 3.3% over the second half. This was in contrast to weakness in equipment spending, which contracted by 3.5% over the second half (-0.1% in Q4) as supply chain pressures and lockdowns saw purchasing decisions delayed. Equipment spending had surged by more than 12% in the first half of the year on the back of accommodative financing conditions, tax incentives and rising demand associated with the economic recovery. 

By sector, non-mining investment declined over the second half of the year (-3.5%) due mainly to equipment spending losing momentum. Mining sector investment advanced over the period (6%) but remained around the levels seen over recent years despite a surge in commodity prices.  

Firms updated their investment intentions for 2021/22, with plans upgraded by 1.6% to around $141bn. This figure implied capex was on track to rise by about 16% compared to the previous financial year. Meanwhile, year-ahead plans for 2022/23 were nominated at $116.7bn, the strongest figure put forward as a 1st estimate since 2014/15.  

Market expectations | Capital Expenditure

In the March quarter, capex is anticipated to have risen by 1.3%. The range of estimates is between -1% to 3.5%. A modest upgrade is likely to be made to the 6th estimate of firms' investment plans, from $141bn to around $144bn. Today's report will also include firms' 2nd estimate of capex plans for 2022/23. Given the strength of the 1st estimate (+11%Y/Y), it is likely this momentum will carry through to estimate 2. However, this could be tempered by the developments over recent months including rising inflation and the intensification of ongoing supply issues due to the Ukraine war. My expectation is for a figure of around $125bn for estimate 2.  

What to watch | Capital Expenditure

Given the weakness seen over the second half of 2021, I will be looking at equipment spending, particularly in the non-mining sector, to see if the earlier upswing has re-gained momentum. The wider reopening of the economy will have helped, but supply issues have continued and inflation pressures have risen.