Contrary to expectations that private investment in the June quarter would be weak, especially after the surprise 1.1% fall in the value of construction work done in the quarter, the investment data yesterday from the Australian Bureau of Statistics (ABS) showed a surprise rise.
The seasonally adjusted increase of 1.1% from the March quarter was contrary to most market forecasts.
The market had been looking for a fall of 0.9% quarter on quarter, and a drop of up to 2% from some economists, so the rise came as a shock to some, and to the currency market and up went the dollar to around 93.60c as the silly traders reckoned it means a rate rise is now going to happen more quickly than previously thought.
That’s an absurd bit of analysis and the fall of 4% year on year was a more understandable outcome given the obvious slowing in investment in the resources sector, and one the market should have focused on.
But the 1.1% rise does show the investment boom is proving to be more resilient than many had thought, and that the fall will be slower than thought.
The key part of the release yesterday was the news that investment in equipment, plant and machinery was down 0.9% quarter-on-quarter to $12.4 billion, and 10.1% year-on-year.
This figure is the only component of capital expenditure that feeds directly into second-quarter GDP data, so it will be a negative to go with the fall in construction work (but in that was a very solid 2.2% rise in residential construction, which feeds directly into the GDP data).
The rise in investment in the three months to June forced some economists to their estimations of June quarter GDP growth to around 0.4%.
That’s close to what seems to be the forecasts from the Reserve Bank (based on the downgrades to its growth estimates earlier this month in the third Statement of Monetary Policy for the year).
Helping lower the growth estimate from the March quarter’s first reported 1.1% will be the weak growth in spending on new plant and equipment, the fall in construction work done, a small negative contribution from retailing and a much bigger negative contribution from net exports after the big trade surplus and higher export volumes in the March quarter fell away in the three months to June to produce a huge, multi billion dollar return to a trade deficit for the period.
Macquarie Securities analyst James McIntyre said in a note yesterday afternoon that without a change in inventory trends seen in the first quarter, or a sharp pick-up in non-retail consumption, the RBA’s implied 0.4% quarter-on-quarter growth could be at risk.
"Given the strong, export-boosted, first-quarter GDP outcome, there is a real risk that a correction in net exports could result in a negative quarterly GDP result," he said.
ANZ said Thursday’s capex data "provide modest downside risks to our second-quarter GDP forecasts".
Westpac also revised down its June quarter GDP growth estimate from 0.4% to 0.3%.
Interestingly the level of estimated investment in the three months to March was boosted by $281 million, which might help offset the restating of some of the export data for iron ore and coal which have emerged in recent monthly trade figures.
Overall, mining and manufacturing companies said they expected to reduce investment in the 2014-15 fiscal year by 10.2% from a year earlier.
Yes, mining investment will fall, and yes, investment in manufacturing is still weak (but showing signs of levelling off. But the ABS said that the group called ‘other industries’ sill see a 12% rise in spending to $55.7 billion from $58.3 billion spent in the year to June.
But judging on previous experience, the sector will lift spending to around $65 billion by June next year, which will mean significant growth.
Other industries mostly cover non-manufacturing and mining sectors in the economy and with a lot of small companies involved, measuring what’s happening is hard..
Economists point out that the ABS captures only half the investment planned by non resource companies and businesses. Health, agriculture, technology and education are not well covered.
Thanks to rising spending in this sector, the overall spend is better than the first estimate a few months ago for a fall of 15% or more, but at just over $145 billion is still a very substantial figure.
In fact up to the last two years, that would have been one of the highest recorded.
Actual spending in the 12 months to June this year was estimated by the ABS at $157.8 billion, marginally lower than the $160.5 million spent in 2013-13.