Below trend growth to continue
2015-16 Capex expectations an important element in the investment outlook
The local data flow starts up in earnest again this week, with the release of two important quarterly investment partials ahead of March quarter GDP due next Wednesday, 3 June. These are Construction Work Done due Wednesday and New Private Capital Expenditure (Capex), released on Thursday. These partials and those due early the week after will help form the RBA’s view of Australia’s economic growth in the March quarter as well as reassess the outlook for business investment and growth as it prepares its brief for the June RBA Board meeting.
Our starting point for the partials is NAB’s model-based estimate for March GDP that is 0.6% q/q, 2.0% y/y. That forecast embodies forecast growth in private residential construction of 2.6% and underlying business investment declining by 2.2%. Those GDP line items provide the starting point to estimate this week’s upcoming quarterly partials.
Construction Work Done peaked in 2012 when resource expansion spending was at its zenith, engineering construction activity has since been in decline. Further declines are in store as the current suite of new LNG projects is completed.
Against that headwind, residential construction activity over the past year or so has been on the rise, reducing but not offsetting the effect of the fall in engineering. Further growth in the pipeline of residential building activity – principally apartments, in Melbourne and Sydney – is set to support further growth in residential activity in coming quarters.
While residential approvals to build have been soaring through April, non-residential building activity has been flat-to-declining, suggesting a flatter outlook for new commercial property development this year. We look for those trends to be reflected in Wednesday’s Construction report, NAB expecting a net forecast decline of 1.0% for the March quarter.
While the non-residential building activity components within the Construction report presents one important element of the business fixed investment story, a more complete picture is presented in Thursday’s New Private Capital Expenditure (Capex) report. That report contains its estimate for the March quarter and thus another important feed into the Q1 GDP story. And the market will also be playing close attention to the expectations for capital expenditure with the second estimate for the coming 2015-16 financial year.
The transition of the economy from reliance on resources to domestically-oriented growth can also be tracked in this report. While resource spending is heavily in retreat, “other industry” (mainly domestically-oriented) Capex has been rising in recent quarters. The outlook for 2015-16 remains somewhat clouded, given the first estimate for the year ahead suggested a decline.
For the March quarter estimate of spending, we’d be surprised if the resources down trend has not continued to dominate, even though the nature of such spending is “lumpy”. For example “Mining” Capex could yet be held up from the continued spending on LNG plants that are nearing completion and further development of the Roy Hill iron ore project. For the March quarter, NAB forecasts that Capex in total will decline by 2.5%, with weakness tilted to the pull-back in Mining Capex that declined by 5.7% in Q4 and with further declines to come as existing projects are commissioned into production.
But whether the resources sector spending holds up better than expected, there will be particular focus on the growth progress of the non-mining sector. The NAB Survey has been reporting a less downbeat view of “other industries” Capex and an indication that manufacturing industry Capex is set to rise. The NAB Survey is more weighted to non-mining/domestic industries and is suggestive that the hoped-for transition will continue to gain some further traction, traction that is already evident in higher frequency reports such as the monthly NAB Business Conditions readings.
For 2015-16 expectations, we look for a second estimate of $114bn, up only marginally from the $109bn estimate surveyed a quarter ago, thanks to our expectation of domestically-driven growth, countering resource sector contraction.
Mining/resource company news has pointed to some further paring back in spending, some cuts also likely to be reflected in lower Mining Capex spending, down to a second estimate of $58bn, from a first estimate of $60bn. This remains the constraint on overall Capex, declines in bulk commodity prices leading companies to further pare costs and Capex.
Bear in mind also that the first estimate usually suffers from some early conservative bias six months out from the start of the financial year and is usually revised up in this survey. Such a second estimate for mining Capex would be consistent with a large prospective decline in resource spending, a decline heralded for some time.
While resource spending is undeniably weak, we look for a 15% net upgrade for “other industries’” Capex from the first estimate of $43.6bn to be revised up to a second estimate of $50bn. Some of this reflects the usual firming up of plans a quarter out from the start of the financial year but some we expect will have come from the net improvement in eastern state-centric business growth.
The second estimate of Manufacturing Capex is expected to be flat at $6bn, and we will be interested to see whether this is too conservative.
Note that this survey was conducted in April-May, so before the Federal Budget but in the pre-Budget environment that heralded a Budget that was being touted politically as conducive to growth and confidence. Some survey returns would have been submitted after the May RBA rate cut, though we doubt that would have heralded any noticeable uplift, as yet, in investment decisions, business borrowing rates remaining at low rates.
In addition to this week’s investment partials, the other main releases for the week ahead are HIA New Home Sales and RBA credit, both due Thursday. We do not have a forecast for HIA home sales but this is one of the few measures of new dwelling demand, including for apartments. HIA members have been reporting a sharp increase in sales in recent months a stark contrast to flat detached home sales.
The pace of RBA credit growth is expected to tick up a little higher to 0.6%/6.4%, a point higher than the 0.5% consensus pick that would be the same as in March. We look for a return to somewhat stronger business credit growth this month after 0.2% growth in March that was the slowest rate of growth since November last year.
The market will also be paying close attention to the pace of housing credit growth, especially investor housing that stepped up to a 0.9%10.4% pace, up from 0.7%/10.1% to March, growth that is testing the upper 10% limit signalled by the monetary authorities to financial institutions last December. We note in this context that dwelling re-sale prices continued rising in April at a fast clip (+0.8% for the eight capital cities), underpinning continued credit growth. That said, APRA is taking steps to slow growth in investor loans to less than 10%.
There is also a speech from RBA Deputy Governor Phil Lowe at a Regulatory Summit in Sydney, on Wednesday morning. (No speech title was available at the time of writing.) With the impending RBA June Board meeting and the Summit’s focus, he’ll likely steer clear of any market sensitive commentary on the economy and monetary policy.
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