Australian economy expands 0.6% in Q3

The Australian economy expanded by 0.6% in the September quarter, a touch softer than the 0.7% increase expected by markets but broadly maintaining the momentum from the first half of the year (1.3%). Real GDP was up 5.9% from the delta lockdowns a year earlier, and 6.5% above its pre-pandemic level.    

Household consumption (1.1%) continued to drive economic growth as spending remained supported by the post-pandemic rebound in services (1.7%), notably in travel (13.9%) and hotels, cafes and restaurants (5.5%). Goods consumption lifted only modestly (0.3%) but still remains more elevated relative to its pre-pandemic level (9.2%) than services (4%), suggesting the rotation in spending patterns has further to run.  

There is an underlying resilience in demand, but it may be losing some strength. Growth in household consumption in Q3 was notably slower than in Q2 (2.1%). Disposable income growth was robust in nominal terms (1.6%), underpinned by income from the strong labour market; however, high inflation meant that real incomes were negative again in the quarter. Cost-of-living pressures were added to by surging interest payments as the RBA continued to raise rates aggressively.  

The increase in consumption relied again on the savings accumulated over the pandemic. Households have been willing to spend out of accumulated savings given the strength in labour income. The household saving ratio has declined to 6.9%, in line with its level on the eve of the Covid crisis.  

Modest and offsetting contributions came through in the remaining components. Residential construction (1%) and business investment (0.7%) expanded as capacity constraints holding back building work eased. The rebound in services spending is driving imports (3.9%), supported also by an improvement to the disruptions that have hampered global supply chains. On the back of this, inventory levels continue to rise adding to growth in Q3. Public demand was neutral for growth in the quarter, though it remains elevated at around 27% of real GDP, up from around 25% of GDP pre-pandemic.   

In other key developments, the terms of trade pulled back from a record high level as prices of key commodity exports retraced. That still leaves the terms of trade 23.1% higher over the Covid period. 

Because nominal GDP growth (0.8%q/q) was slower as a result of the decline in the terms of trade, inflation pressures measured by the GDP deflator declined to 0.2% in the quarter (6.9%Y/Y). However, the household consumption deflator lifted by 2%q/q, leaving the annual pace up at 6%, a softer outcome than the CPI (7.3%) but still indicative of the material cost-of-living increase households have faced. 

Link to the full review here 

RBA hikes rates by a further 25bps

The RBA Board hiked its key rates by 25bps to 3.1% on the cash rate target and 3.0% for Exchange Settlement balances. Rates have risen by a cumulative 300bps since May, a rapid pace of tightening coming off the emergency settings in the pandemic when the cash rate floored at 0.1%. The tightening cycle in Australia may extend further into 2023, but a pause is coming nearer. 

Today's decision statement from Governor Philip Lowe left a clear message as the Board heads for its summer break. The commitment to lowering inflation back to target remains firmly intact, leading to rates being hiked for the 8th month in succession and its tightening bias retained going into 2023. By continuing to tighten monetary policy, the Board is acting to guard against the risk of a "prices-wages spiral" where high inflation feeds through to influence wage settings. The RBA continues to see further upside in inflation (to a peak of 8%), while the governor noted the recent strength in labour market outcomes, including a new historic low of 3.4% for the unemployment rate and rising wages growth. 

However, balancing those developments, the governor also pointed out that growth is forecast to slow to 1.5% in 2023 and 2024, a pace well below trend in Australia. But the risks look to be tilted to the downside given the governor highlighted there had been a "substantial cumulative increase" in rates and the full effect of monetary tightening had not yet been transmitted through the economy. The RBA remains sensitive to the risk of overtightening, repeating the line that it is aiming to keep the economy "on an even keel" as it hikes rates to return inflation to target.  

In looking ahead, the Board's guidance was retained that it "...expects to increase interest rates further over the period ahead" but the qualifier of policy not being "on a pre-set course" was returned to the statement. A similar qualifier has already been used in this tightening cycle preceding the downshift from 50bps to 25bps rate hikes. Given the next quarterly CPI data will print ahead of the RBA's return in early February, a further rise in inflation may see the Board hiking rates further; however, that might be about it for the tightening cycle. 

What the RBA would likely need to see for it to pause is the inflation outlook in February's forecasts coming back into the 2-3% target range by the end of the projection period. Currently, inflation is seen above 3% through 2024, but if the data over the summer is consistent with weaker growth dynamics globally and domestically, and if there are more convincing signs inflation is turning lower, that could be enough to lower the RBA's inflation outlook sufficiently to generate a policy pivot.    

Australia Current Account -$2.3bn in Q3; net exports -0.2ppt

Australia recorded a deficit on current account for the first time since early 2019 in the September quarter, ending a historic run of surpluses. A retracement in commodity prices drove a decline in the terms of trade. Net exports will deduct 0.2ppt from economic activity in Q3, but markets had expected a larger fall (-0.5ppt). 

Balance of Payments  — Q3 | By the numbers

• Australia's current account unexpectedly swung into deficit in Q3 at -$2.28bn (vs $6bn expected) from a surplus of $14.75bn in Q2 (revised down from $18.32bn). 

• The trade surplus narrowed by $11.1bn to $31.2bn as export earnings weakened (-0.2%q/q) to $172.3bn and import spending accelerated (8.2%q/q) to $141.1bn.  
• The income deficit is at record wides, extending out to -$33.2bn from -$26.8bn (revised from -$24bn), driven rising by dividend and interest payments to foreign investors.    
• Net exports are expected to deduct 0.2ppt from Q2 GDP growth. 

Balance of Payments — Q3 | The details 

Australia's international trade dynamics deteriorated in the September quarter as falls in commodity prices weighed on export earnings (-0.2%) and import spending (8.2%) continued to rise, driven by the post-pandemic rebound in services and inflationary effects. The net effect saw the trade surplus narrow by $11.1bn, though it remained historically elevated at around $31.2bn in the quarter.  

The 0.2% fall in export earnings came despite the volume of exports rising by 2.7% in the quarter. That was due to export prices falling by 2.8% in the quarter as the prices of key commodity exports retraced from elevated levels. Meanwhile, the 8.2% rise in import spending factors in a 4.1% increase in import prices, with underlying volumes lifting by 3.9%. The key takeaway from all this is that the terms of trade - a tailwind that has supported national income through the Covid period - contracted by 6.7% in Q3, retracing from a record high level. However, that still leaves the terms of trade up by 23% since the end of 2019. 

In volume terms, growth in imports (3.9%) outpaced exports (2.7%), which according to the ABS is expected to result in net trade taking 0.2ppt away from GDP in tomorrow's national accounts. In terms of goods trade, the contributions from exports (1.4%) and imports (1.5%) were broadly offsetting. Somewhat surprisingly given an easing in weather-related disruptions, resources exports were soft in Q3 (-0.4%). Goods imports moved to 18.4% above their pre-pandemic level as global supply chain pressures continued to be resolved.

For services, imports (16.2%) well exceeded exports (10.6%). The driving factor is that post the pandemic restrictions on travel, offshore travel by Australians is rebounding at a faster pace than inbound travel by foreign residents, though both are still well down on their respective pre-pandemic levels. 

Balance of Payments — Q3 | Insights 

The current account surprised by falling into deficit for the first time since Q1 2019. The decline in the terms of trade was expected given the retracement in commodity prices after the surge that followed the Russian invasion of Ukraine. The outcome for net exports was a smaller-than-expected drag for Q3 GDP at -0.2ppt compared to the -0.5ppt deduction expected by markets.   

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The ABS also published quarterly statistics for public demand this morning. Public expenditure was broadly flat rising by just 0.1% in the quarter while underlying investment declined by 0.2%. The ABS's estimates indicate public demand will subtract 0.2ppt from quarterly GDP.  

Preview: RBA December meeting

The RBA Board is likely to hike its key rates by 25bps at today's final meeting for 2022 (decision due at 2:30pm AEDT), lifting the cash rate target to 3.1% and the Exchange Settlement rate to 3.0%. Rates have been hiked rapidly rising by 275bps since May and with the full effect of that tightening to come the hiking cycle may be approaching the end of the line. 

Today's meeting appears relatively straightforward. Inflation is far above the RBA's target band and, despite a softening in the monthly CPI indicator, is unlikely to have peaked. Wages growth is finally picking up rising above 3% for the first time in 9 years in Q3 as the labour market continues to tighten. A rebound in employment saw the unemployment rate fall to a new half-century low of 3.4% in October. The RBA does not assess the pace of wages growth to be inconsistent with the inflation target but given the significant reduction in labour market spare capacity to very low levels, it is keeping the situation under close monitoring. 

The forecasts published by the RBA last month show inflation is expected to fall gradually over the next couple of years but to still be above the top of the target band in late 2024. As a result, the Board has retained its guidance that it expects to raise rates further, a message it will want to act on ahead of its summer break. There are, however, signs that a pause in the hiking cycle is approaching. 

The RBA has said it is aiming to return inflation back to the 2-3% target band "over time" while keeping the economy "on an even keel" by avoiding overtightening. To help guard against that risk, the pace of tightening was downshifted to a 25bps hike in October following four 50bps increases in succession. While not precluding a return to 50bps hikes if required, the November meeting minutes noted the Board was open to pausing the hiking cycle given rates had "increased significantly" and the full effect of that tightening was yet to be transmitted to the economy.   

Futures markets price the terminal cash rate to be around 3.5%, though yields on 3-year Commonwealth government bonds suggest it could be slightly lower. After today's meeting, the RBA Board will next meet on February 7. Another rate hike could be in order there given the meeting will follow the Q4 CPI data that is expected to see inflation hit a peak of 8%, but that might be about it for the hiking cycle.  

Australian Business Indicators Q3: Inventories 1.7%

The September quarter looks to have been another robust one for Australian businesses as household demand remained resilient to cost-of-living pressures, rising interest rates and weak sentiment. An easing in weather-related disruptions likely supported a rebound in resources sector production, driving a stronger-than-expceted rise in inventories. A retracement in commodity prices and margin pressures, however, weighed on profits. 

Business Indicators — Q3 | By the numbers 

• Inventories incresed by 1.7% in the September quarter to $184.2bn, stronger than expected (1%) and up from Q2's 0.5% rise. Inventories expanded by 7.9% through the year.  
• Company gross operating profits pulled back from record highs, down 12.4% in the quarter to $132.2bn, a large downside surprise on expectations (-1.5%) but were still 8.5% higher over the year. 
• Wages and salaries lifted by a further 2.9% in Q3 to $168.9bn to be 11% higher through the year.
• Sales increased by 1.1% in the September quarter following rises of 1% in the previous two quarters, driving up volume growth by 7.3% over the year. 

Business Indicators — Q3 | The details

Today's report for the September quarter showed that Australian businesses are continuing to experience resilient demand, but profits declined amid a combination of lower commodity prices and margin pressure in a high inflation environment. 

Eased supply and weather-related disruptions look to have boosted inventories in the quarter; the mining sector posted a 10.7% surge in inventories after persistent wet weather weighed on production in recent quarters. There was also a notable rise in retail inventories (4.4%) following a decline in Q2 (-1.1%). Wholesale inventories fell for the first time in a year (-1.3%) but those volumes are up almost 7% on pre-pandemic levels. 

Sales volumes reflected the resilience of demand rising by 1.1%q/q, a touch stronger than the 1% rise in each of past two quarters. Excluding the mining sector, sales advanced by 1%q/q on the back of similar increases in Q2 (1.0%) and Q1 (1.2%). The underlying picture pointed to solid household demand continuing with sales up in retail (1.3%), accommodation and food (3.4%) and transport (3.6%), which includes travel. 

Overall, sales volumes have risen to 5% above their pre-pandemic level whereas invetories are up by 3.9%. That excess demand has been a factor contributing to the rise in inflation in Australia. 

Company profits were down sharply in the quarter by 12.4% driven largely by a fall in mining profits (-19.1%) as commodity prices pulled back from very elevated levels. However, adjusted for changes in the value of invetories (a similar approach to the national accounts), company profits were down by a much smaller 4.6% in the quarter. 

Non-mining sector profits were also lower, down 4.5% in Q3 where the main factor is likely to be margin pressure due to high inflation in business operating costs. That looks to be the case in the construction industry (-2.5%q/q) reflecting the higher costs for materials and labour.  

The national wages bill rose solidly by 2.9% in the quarter, though that was softer than in Q2 (3.4%) as the pace of hiring slowed. Wage costs surged by 11% from a year earlier when the economy was hit by lockdowns during the Delta wave of Covid-19, reflecting strong rebounds in employment and hours worked as the pandemic has dissipated. Another driving factor has been increased bonus payments and more hours worked at overtime rates as the labour market has tightened.  

Business Indicators — Q3 | Insights

The detail in today's report indicates inventories are likely to have added to GDP growth in Q3, potentially by around 0.5ppt — though this component can often surprise in the national accounts. More broadly, the themes in the business indicators release are consistent with more frequent business surveys. Demand has been robust, inventories have been rebuilt as supply chain pressures have eased, but rising input costs have squeezed profit margins. 

Macro (Re)view (2/12) | Subtle shifts

Risk assets rallied strongly as markets drew a dovish interpretation from a speech by US Federal Reserve Chair Jerome Powell. That momentum was checked by strong US employment and wages data late in the week that suggested the overall picture for US rates will remain hawkish. In the Asian region, equities were boosted by reopening speculation in China. Next week, the RBA is expected to hike rates by 25bps and Australian Q3 GDP data will contain key insights on households.     

Status quo to hold for the RBA... 

Going into next week's RBA meeting, expectations are set on another 25bps rate hike ahead of the Board's summer break. Governor Philip Lowe at his Senate appearance and then at a Bank of Thailand event said domestic inflation was forecast to slow next year as the effects of eased supply pressures, falls in commodity prices and higher interest rates work their way through the economy. In encouraging signs, the monthly inflation gauge in October showed headline CPI softened from 7.3% to 6.9%yr and from 5.4% to 5.3%yr on an underlying basis; however, that is short of the evidence the RBA needs to pause its hiking cycle, with only 43% of prices in the basket updated for October, household energy prices being a notable exclusion.

... with Q3 GDP to provide key insights on households 

Time will also be needed for the Board to consider the Q3 GDP report, which won't be available until the day after the December meeting. Here, the key details will centre on household spending, incomes and saving. As my GDP preview outlines, the consumer is expected to have remained robust in the quarter but the headwinds from falling real incomes and weak sentiment are consistent with the RBA's weaker growth outlook in 2023. The first signs of that weakness may have emerged as retail sales fell by 0.2% in October (-0.6% ex-food), though that should be read with some caution given that spending is likely to rebound in November due to Black Friday sales (see here). 

Lead-in indicators for Q3 GDP for construction activity and business investment this week were mixed. Construction work done advanced by 2.2% in the quarter supported by engineering activity and a rebound in building activity from weather-related and supply disruptions (see here). That was counterbalanced by a disappointing outturn from capital expenditure in Q3 (-0.6%) as equipment spending pulled back (see here). Forward-looking investment plans for 2022/23 remain upbeat despite expectations for a global and domestic economic slowdown. The 4th estimate of investment plans indicates firms intend to lift capex over the back half of the current financial year to just shy of $160bn, which is the strongest outlook since 2014/15. 

The housing market continued to show its sensitivity to the RBA's tightening cycle. Rising interest rates are weighing on housing finance commitments, down a further 2.7% in October (see here), while housing prices nationally corrected lower again in November to be 7% below their recent peak according to CoreLogic. The dynamics are also weak for dwelling approvals posting a larger-than-expected decline of 6% in October (see here).  

Fed Chair Powell sees risk of overtightening 

US Fed Chair Powell's speech to the Brookings Institution effectively confirmed to the markets that the downshift to a 50bps rate hike at the upcoming FOMC meeting is locked in. Whereas at the previous meeting Powell's message was that greater risks were posed to the economy from not tightening monetary policy enough, this week there were signs of a softening in that stance. Following his prepared remarks, Powell said the FOMC wanted to avoid overtightening in the first place, and it would risk manage the situation by slowing the pace of rate hikes. However, Powell was clear that downshifting was of much less significance to the FOMC than the terminal level rates need to hit to lower inflation back to target and the length of time they need to remain in the restrictive zone. 

Price and wage dynamics have yet to show convincing signs of turning as the US economy remains underpinned by resilient households. Real growth in personal consumption expanded by 0.5% in October, its strongest increase since January. The labour market remains a key support for household income as a stronger-than-expected 263k jobs were added to nonfarm payrolls in November. That kept the unemployment rate at 3.7%, remaining around its lows from the eve of the pandemic. But with the participation rate now materially lower than in early 2020 (62.1% on the latest read), a constrained supply side sees average hourly earnings growth at the elevated pace of 5.1%yr. That remains around the pace of inflation on the Fed's preferred gauge with the core PCE deflator running at 5%yr in October.             

Better signs on euro area inflation 

Euro area inflation remains a long way from coming back to the ECB's target, but the worst of it may at least be in the past. Inflation in the euro area has continually surprised to the upside of expectations in 2022, so an easing in the headline rate from 10.6% to 10%yr - coming in below the 10.4% expected - made for a welcome change. But core inflation holding steady at 5%yr is indicative of the broad-based nature of price pressures. Although there is little sign of high inflation becoming embedded in wage-setting processes, the situation remains under close watch by the ECB given the strength in the labour market has pushed the unemployment rate down to a new series low of 6.5% in October. 

ECB President Christine Lagarde told the European Parliament this week that the Governing Council expects to keep tightening its monetary policy stance to prevent inflation expectations from breaking higher. November's inflation data may be enough to sway the Governing Council into downshifting to a 50bps hike from 75bps later this month. Lagarde also said that plans for reducing the ECB's balance sheet - part of the tightening in monetary policy - would be announced at the upcoming meeting. 

Preview: Australian Q3 GDP

Australia's September quarter national accounts are due to be published by the ABS today at 11:30am (AEDT). Markets expect Real GDP to have expanded by 0.7% in the quarter following solid growth over the first half of the year. Household spending remained resilient to cost-of-living pressures and weak sentiment as the services sector continued to rebound from the pandemic and with the strong labour market bolstering incomes. 

Economic headwinds from offshore intensified in the September quarter. High inflation caused by pandemic-related effects and the war in Ukraine combined with monetary policy tightening to slow growth in OECD economies. Meanwhile, activity in China rebounded as Covid lockdowns were eased. 

Strength in the domestic labour market consolidated in Q3, with the unemployment rate and overall spare capacity remaining at historical lows. Although the pace of hiring slowed, forward-looking indicators remained consistent with strong demand for labour. The tightening in the labour market had driven an uplift in wages growth to 9-year highs. 

Households continued to endure a period of falling real incomes as inflation accelerated above 7% — its fastest pace since the early 1990s. In response, the RBA hiked interest rates by 150bps during the quarter. Although the full effects of rising interest rates are yet to flow through to households, consumer sentiment fell to the depths seen at the outset of the pandemic. 

Despite this, solid momentum in household spending was maintained. The effects of the pandemic were continuing to dissipate and this was supporting demand for discretionary services such as travel and dining out and associated categories, notably clothing and footwear. Accumulated savings built up over the pandemic and strong labour incomes were underpinning household spending. 

The transmission of the RBA's tightening cycle was starting to take effect in the housing market. Housing prices fell by around 4% nationally in Q3, with the Sydney market seeing a larger decline of 6%. Residential construction work rebounded in the quarter after being hampered by supply constraints for materials and labour and wet weather from an extended La Niña event. Non-residential building also picked up, but business investment was weak overall as equipment spending pulled back. Australia's international trade dynamics turned less favorable as prices for key commodity exports retraced from elevated levels. Import prices continued to rise, albeit at a slower pace than in prior quarters. 

As it stands | National Accounts — GDP

The Australian economy expanded by 0.9% in the June quarter following a similar increase in the March quarter (0.7%). Activity over the first half of the year showed resilience to Covid and weather-related disruptions, rising cost-of-living pressures and weak consumer sentiment. Real GDP increased by 3.6% through the year and was 5.5% above its pre-pandemic level.  

Household consumption remained strong rising by 2.2% in the quarter driven by the recovery in the services sector. The easing of restrictions on travel gave momentum to the rebalancing of consumption patterns, with spending increasingly rotating back to services (3.6%) from goods (-0.1%). Consumption was in large part funded by households spending more of their disposable income — in part due to high inflation — driving a reduction in the household saving ratio from 11.1% to 8.7%. 

Exports contributed strongly to growth in Q2 (1ppt) as rural goods and resources production rebounded from weather-related disruptions earlier in the year. Inbound tourism also boosted exports following the full reopening of the international border. On the back of elevated prices for major export commodities, the terms of trade lifted to a record high. Import volumes consolidated (0.7%) after surging in the previous quarter (11.3%) as restrictions on offshore travel eased. Overall, net exports added 1ppt to Q2 GDP; however, that was offset by a pullback in inventories (-1.2ppt) after a rebuilding effort returned stocks to pre-Covid levels.  

Private investment was soft in Q2 and over the past year. Adverse weather added to materials and labour shortages to further hamper residential construction activity (-2.9%q/q). Those headwinds have also held back non-residential building (-1.9%q/q), which weighed on business investment in Q2 (0.6%). Public demand was steady in the quarter but has risen strongly over the past year (6%). Government spending has been elevated alongside the pandemic and flood recoveries, while a substantial pipeline of infrastructure projects has supported public investment. 

Key dynamics in Q3 | National Accounts — GDP 

Household consumption — The post-Covid rebound in the services sector drove household spending as retail volumes slowed sharply to nearly stall in the quarter. Demand remained solid despite very weak sentiment due to cost-of-living pressures and rising interest rates.  

Dwelling investment — Residential construction activity rebounded in the quarter as the effects of La Niña and supply constraints eased. New home building saw its strongest quarterly rise since late 2020, though alterations are unwinding from the peaks of the pandemic.

Business investment — Private sector capital expenditure weakened as equipment and machinery investment pulled back from strength earlier in the year. A pick up in non-residential building provided some offset as weather-related and supply disruptions eased. 

Public demand — Government expenditure consolidated at high levels following the pandemic and flood responses. Public investment pulled back from recent strength. Overall, a net negative for Q3 activity.    

Inventories — An easing in weather-related disruptions and supply contains enabled inventories to rise solidly in Q3, potentially adding 0.4ppt to GDP growth. 

Net exports — Set to subtract 0.2ppt from quarterly activity. Import volumes (3.9%) outpaced exports (2.7%) as the services sector continued to rebound led by overseas travel. Resources export volumes were soft and key commodity prices retraced from elevated levels.  

Australian housing finance falls 2.7% in October

Australian housing finance commitments fell for the 7th month in succession as the housing market continues to slow alongside the RBA's rate hiking cycle. Tighter financing conditions are working to reduce demand for loans, with housing prices falling as a result. Refinancing activity remains very strong.  

Housing Finance — October | By the numbers

• Housing finance commitments (ex-refinancing) came in broadly as expected falling by 2.7% in October to $25.8bn following a 4.4% decline in September. Commitments have fallen by 17.1% over the past 12 months. 
• Owner-occupier commitments fell by 2.9% to $17.2bn, a 26-month low.
• Investor commitments were lower by 2.2% to $8.6bn, retracing back to their level in April 2021. 
• Refinancing was just below record highs at $17.8bn in October after falling by 1.1% in the month. 

Housing Finance — October | The details 

Tighter financing conditions due to the RBA's rate hiking cycle continue to weigh on home lending and housing prices. The value of new loans written in October fell by 2.7% to be down for the 7th month in succession. This saw financing commitments (excluding refinancing) sliding to $25.8bn, their lowest level since December 2020. 

Commitments to the owner-occupier segment have fallen every month since the RBA started raising interest rates in May. Lending to upgraders has seen a more sustained fall and commitments were down for the 9th month running in October. Construction-related lending (for new builds and newly constructed homes) has retraced to $3.1bn to be broadly in line with pre-Covid stimulus levels. The ending of construction subsidies and the very sharp rises in home building costs over the past year or so have driven this unwind. In the first home buyer market, commitments fell to $4.1bn in October and are back at early 2020 levels. 

By volume, the number of loans written to upgraders fell by 4.9% to 21.4k - their lowest level since July 2020 reflecting the slowdown in housing market activity brought about largely by higher rates. Construction-related loans are down by 18.8% over the past year as the home building sector has turned its focus to working through a very substantial pipeline of new homes. Volumes for first home buyers have averaged just under 9k since RBA rate hikes commenced, to be back around mid-2019 levels. 

Lending to the investor segment was $8.6bn in October and has cut back sharply since peaking at a record high in March, down 24% over the period. The pullback from investors has been most pronounced down the east coast in New South Wales, Victoria and Queensland. 

The monthly flow of refinancing was slightly lower in October but remains around record highs; in a rising interest rate environment, many borrowers are switching lenders for more competitive offers. 

Housing Finance — October | Insights

The interest-sensitive housing market is responding to aggressive monetary tightening with financing commitments down sharply over the past couple of months. Alongside this, housing prices nationally are down 7% from their Covid peak in April 2022 according to CoreLogic.

Australian Capex -0.6% in Q3; 2022/23 investment plans $155.7bn

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.