Investment to dive as mining boom ends
Business investment in Australia, dominated by the mining sector, could slip by 12 per cent this year and more than 20 per cent next year, ratings agency Standard & Poor's said in a report. Such falls would reverse the 20 per cent growth during the past two years.
"The estimated decline in spending, if realised, would be the worst capex growth figures for Australia in the 10-year period we have data for, exceeding the downturn that followed the global financial crisis," S&P's credit analyst Terry Chan said.
Global capital expenditure, which had been dependent on the energy and materials industries, appeared to be stalling before it had even started to recover, and looked to be weak over the next few years.
"Despite a modest post-financial crisis recovery, real-terms capital expenditure growth slowed in 2012 and is expected to turn negative in 2013. Early indications for 2014 are even more pessimistic, suggesting a 5 per cent contraction," Mr Chan said.
China has warned of slower growth as the central government implements sweeping economic reforms.
Chinese Finance Minister Lou Jiwei said economic growth of 6.5 per cent would not be a "big problem", adding he was confident of 7 per cent growth this year. The economic powerhouse is set to report its second-quarter gross domestic product data on Monday.
The S&P survey of 91 Chinese companies also forecast business investment to slide by 4 per cent this year and 6 per cent next year.
Mr Chan said a fall in investment by Chinese firms was reflected in the country's weaker first-quarter GDP figures. The slower growth could hit Australian exports to the country.
Business conditions and confidence have remained soft in Australia. NAB's monthly survey for June fell to a four-year low as trading, profits and employment conditions weakened.
A drop in capital expenditure would hit Australian banks, which have continued to experience subdued personal and business lending over the past few years.
Business credit rose by 0.1 per cent in May and 0.2 per cent in April, figures released by the Reserve Bank in late June showed.
Business credit grew by 0.9 per cent over the year to May.
S&P said the dominance of the energy and materials sectors in total global capital expenditure had created a "fair degree of dependency". Business investment growth lifted just 2 per cent last year and could potentially decline by 2 per cent this year with the two industries excluded.
"Downward pressure on corporate capex in Australia is a troubling harbinger in this regard, with the scale of projected decline in 2013 [and] 2014 suggesting that mining and commodity companies are anticipating a major downswing," the authors said.
Frequently Asked Questions about this Article…
Standard & Poor's warned that business investment in Australia, which is dominated by the mining sector, could fall sharply — around 12% this year and more than 20% the following year — reversing recent growth and potentially producing the worst capex outcome in the last decade, according to the report and S&P credit analyst Terry Chan.
The article explains that Australia's business investment has been heavily driven by mining and commodities. If the commodity 'super cycle' unwinds, mining and materials companies are likely to scale back projects, which would reduce overall capital expenditure and weigh on business investment growth nationally.
The article notes that a drop in capital expenditure would hit Australian banks because they have already experienced subdued personal and business lending. While business credit showed small monthly increases (0.2% in April and 0.1% in May) and grew 0.9% year‑on‑year to May, weaker capex could further dampen demand for business loans.
China is a major factor: S&P's survey of 91 Chinese companies forecast Chinese business investment to fall about 4% this year and 6% next year. Chinese policymakers have flagged slower growth as they implement reforms, and S&P said weaker investment by Chinese firms has already shown up in softer GDP and could reduce Australian exports to China.
Global capital expenditure appears weak as well. The article cites S&P saying global capex — heavily dependent on energy and materials — stalled before recovering and looked likely to be weak for the next few years. Real‑terms global capex growth slowed in 2012, was expected to turn negative in 2013, and early indications for 2014 suggested a possible 5% contraction.
Energy and materials (mining and commodity companies) dominate total global and Australian capital expenditure. S&P said that this dominance has created a high dependency on those sectors, and projected cutbacks in mining and commodities are the main drivers of the anticipated capex downturn.
Business conditions and confidence in Australia were reported as soft: the NAB monthly survey for June fell to a four‑year low, with trading, profits and employment conditions weakening. This softer business sentiment aligns with the S&P view of downward pressure on corporate capex.
Based on the article, investors should monitor S&P and other capex forecasts, Chinese GDP and corporate investment trends, commodity and mining sector announcements, banking and business credit data (monthly lending figures), and business confidence surveys like NAB's monthly report — all of which the article links to the outlook for corporate capital expenditure.
Call 1300 880 160
Start a chat
Schedule a call
