Capital expenditure by Australian firms fell unexpectdly by 0.6% in the September quarter following a soft first half of 2022. Forward-looking investment plans continue to point to capex picking up over the back half of the current financial year, with capex in 2022/23 on track to rise to its highest level since 2014/15, despite headwinds to the domestic and global economic outlook and higher financing costs due to higher interest rates.
CapEx — Q3 | By the numbers
- Private sector capex weakened by 0.6% in the September quarter to $33.9bn (in chain volume or real terms), disappointing expectations for a 1.5% rise. Growth eased from 2.2% to 1.7% through the year. Q2 capex was revised to a flat outcome from a 0.3% decline.
- Equipment, plant and machinery capex pulled back by 1.6% to $16.3bn (2.2%Y/Y) following strength over the first half of the year.
- Buildings and structures capex partially rebounded from disruptions associated with wet weather and capacity constraints in the first half to rise by 0.5%q/q to $17.6bn (1.4%Y/Y).
- Firms' 4th estimate of capex plans for 2022/23 was $155.7bn, representing an upgrade of 5.6% on the previous estimate from 3 months ago.
- Estimate 4 implies capex is on track to rise by 12.4% compared to 2021/22.
CapEx — Q3 | The details
Capital expenditure contracted by 0.6% in Q3 following a soft first half in 2022 (0.4%). Capex had strong momentum alongside the economic recovery from the pandemic but this has faded over recent quarters. Disruptions to supply chains and in the construction sector seem likely to be the key factors, but higher prices for imported goods could also be weighing on demand.
The weakness in headline capex was driven by a 5.1% quarter-on-quarter fall in the mining sector, with declines in both equipment (-4.9%) and structures investment (-5.3%).
Capex in the non-mining sector was up by 1.4%q/q, its strongest rise in more than a year. That was due to the buildings and structures component rebounding (4.3%) from recent disruptions, broadly consistent with yesterday's construction activity data. In contrast, equipment spending in the sector fell by 0.9%q/q, its weakest outturn since the pandemic in mid 2020.
Forward-looking investment plans for the 2022/23 financial year were upgraded by 5.6% to $155.7 on the 4th estimate. The magnitude of that upgrade is in line with the average increase between estimates 3 and 4 over the history of the series dating back to the late 1980s.
Overall, capex plans sit at their highest level since 2014/15; however, I had anticipated a more robust increase to around $165-170bn. That was based on indicators in business surveys that have reported capacity utilisation being stretched in many large industries, coming after a period of delayed or deferred investment through the pandemic. Note that the level of capex spending in Q3 was $33.9bn, which is broadly in line with the subdued levels seen prior to the onset of Covid.
By sector, compared to estimate 3, investment plans for 2022/23 were upgraded by 6.8% in the non-mining sector to $108.9bn, and by 3.0% to $46.8bn in the mining sector.
For non-mining investment, planned spending on equipment has incresed by 11.5% to $53.3bn, but the increase for buildings and structures was only 2.6% to $55.6bn.
Plans for mining investment in equipment rose by 6% to $13.2bn while buildings and structures were upgraded by 1.9% to $33.7bn.
CapEx — Q3 | Insights
Capex was disappointingly weak in Q3 as a fairly modest expected rebound failed to materialise. The decline in equipment spending (-1.6%) is a weak input to factor in ahead of next week's Q3 GDP release. Forward-looking investment plans remain upbeat overall, suggesting firms still plan to increase capex despite a weaker outlook for economic growth domestically and offshore and higher financing costs.
