SCOREBOARD: Capex sting

Today's capex data highlights strong downside risks to GDP and could see markets again pricing in aggressive rate cuts.

The data:

– Australian capex was estimated to have declined 0.3 per cent in the December quarter. This was weaker than the market forecast for a 3.8 per cent increase and comes after a 14.6 per cent gain in the third quarter (revised from 12.6 per cent).
– By asset, the capex fall was driven by plant and equipment (-2.1 per cent after 7.1 per cent). Buildings and structures rose 0.9 per cent.
– By industry, capex rose 5.6 per cent in mining after a 26 per cent rise, while manufacturing investment fell 9 per cent after a 9 per cent rise. Investment fell 4.8 per cent in ‘other' sectors.
– Investment is expected to increase by 36 per cent in 2011-12 (fifth estimate) and a further 36 per cent in 2012-13 (first estimate).
– Building approvals rose by 0.9 per cent in January after a 0.8 per cent fall in December to be 14.6 per cent lower annually. This reflected a 0.1 per cent fall in private house approvals and a 1.5 per cent increase in apartment approvals.
– Dwelling prices rose by 0.8 per cent in February, according to RP Data-Rismark.

What the data means:

The risk was that capex would fall in the month and it did, although in the event it was reasonably modest and followed an upwardly revised, and very strong, third-quarter print. The risks for fourth-quarter GDP are material then and investment looks like it will make a solid detraction to growth. At this stage I’ve revised my GDP forecast from 0.8 per cent to something more like 0.3 per cent but that isn’t a final forecast. I’ll wait for net exports, inventories and the public numbers. Suffice to say there are very big downside risks to fourth-quarter GDP and on the figure, markets could whip back into pricing aggressive rate cuts.

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Beyond that, businesses are telling us that investment will continue to surge this year and next – by a cumulative 70 per cent. Most of it is expected to be in the mining space which, according to this survey, is forecast to rise 78 per cent this year and 62 per cent next. Massive. Investment in manufacturing is expected to rise 8 per cent this year but then fall 9 per cent in 2012-13. Meanwhile, in ‘other’ sectors (construction, wholesale, retail services), investment is expected to be flat this year and then rise 4 per cent next.

Measuring how investment intentions compare to the third quarter is tough, but manufactures have upgraded their investment expectations compared to September last year, while ‘other’ industries have downgraded their intentions. When you are talking 140 per cent growth in mining investment, it doesn’t really matter if whether there is an upgrade or downgrade at this point.

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On the approvals front there isn’t too much to say. The above chart shows that approvals remain weak and over the last few months there has been only a modest rebound.

Given all of this, there will be few policy implications from today’s data.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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