Day after day, the 'stability' in the stock "markets" (specifically in AsiaPac) is posited as 'proof' that China is 'fixed', the worst is over in EMs, The Fed can raise rates, and massive monetray policy manipulation of market signals had no mal-investment consequences. Well all of that utter crap just got obliterated as China's right-hand-man in the credit-fueled commodity boom bust - Australia - just saw its business capital expenditure collapse 20% YoY - the biggest drop ever, accelerating the crash in business spending to 11 quarters. As Goldman warns, this exposes significant downside risk to any forecast for GDP recovery in 2016.
Recovery? Spin this into recovery!!
As Goldman Sach details,
For consecutive quarters, Australia’s private capex report was weaker than expected across the board – highlighting the risk of an outright contraction in domestic demand in 3Q2015 and a disappointing recovery in growth through 2016. In particular, we note a -9.2%qoq decline in capex in the quarter (BBG consensus: -2.9%qoq), and further sequential deterioration in the FY16 investment intentions component of the report. As it stands, the data speak to an ~-20% contraction in capex in FY16 which – even assuming better capex trends outside of this survey – appears completely at odds with the ~-7% decline in investment forecast by the broader consensus (Consensus Economics). Today’s data highlight that domestic demand likely contracted outright in 3Q2015 and the downside risk to the RBA’s forecast recovery in GDP to a +3.0%yoy pace by end-2016. If growth continues to fall short of expectations as we fear, the prospect of RBA rate cuts remains a very real one.
Private capital expenditure, Septquarter: -9.2% qoq, -20.0% yoy (Bloomberg consensus: -2.9% qoq, GS: -4.0% qoq);
- Machinery & equipment (MEI): -8.2% qoq, -12.7%yoy
- Building & structures (B&S): -9.8% qoq, -23.6% yoy
Private capital expenditure,2015-16Intentions (4thestimate): -19.7% (down from -18.8% 3rd estimate)
- Mining sector: -30.6% (from -29.1% previously)
- Manufacturing: -9.8% (from -8.8% previously)
- 'Other': -8.5% (from -8.1% previously)
1. Today’s capex report was weaker than expected across the board, with weaker implications for both investment in 3Q2015 and the outlook through FY16 as a whole. Looking specifically at the historical data , the headline -9.2%qoq decline in private capex was a far larger contraction than expected (GS: -4.0%qoq; BBG consensus: -2.9%qoq), with weakness equally spread across the building & structures (-9.8%qoq) and machinery & equipment (-8.2%qoq) components. It is this fall in the latter that has the most relevance for next Wednesday’s 3Q2015 National Accounts and – alongside yesterday’s weak construction data - is a stark reminder that the unwind of Australia’s mining investment boom presents a profound headwind to overall growth.
2. Looking at the investment intentions data, the read-though was also to the weaker side. To be clear, on face value, the “raw” estimate for FY16 spending increased by ~$4.6bn to $120.4bn compared with the third estimate for FY16. There are several important caveats to this apparent improvement however:
- Firstly, compared with the fourth estimate for capex spending for FY15, the raw $120.4 number implies a 20.9% fall.
- Secondly, as there is typically a tendency to initially under-estimate in the survey process and therefore almost always a very strong increase in capex estimates at this point in the survey, it is important to adjust the raw numbers using realization ratios. Using long-run realization ratios, for example, has markedly weaker implications – we note that compared with the third estimate for FY16 (-18.8%), the fourth estimate suggests capex will fall by an even larger -19.7% in FY16. In context, there has now been a sequential deterioration in the FY16 capex outlook over each of the past four estimates, with this deterioration broad-based across the “other selected industries” (-8.5%) and mining sectors (-30.6%).
- Finally, putting the ~20% decline in FY16 capex suggested by today’s data in context, we note that markedly more modest declines in broader business investment are currently baked into the forecasts of consensus (~-7.0%), Treasury (-7%) and ourselves (GS: -11.5%). To be fair, the capex survey does not incorporate trends in public spending in health and education – however, fiscal constraints and relevant leading indicators all suggest that the outlook in these sectors is subdued at best. All things considered, this survey appears completely at odds with the relatively modest contraction in investment many are forecasting. For our part, we remain the most bearish in the market on the investment cycle and see the risks to our own forecast as skewed to the downside (For full details on our relatively cautious views on the investment outlook, please see: Detail - Australia and New Zealand Economic Analyst: Ongoing risks to Australian Investment: A Regional Perspective, 17/8/2015).
3Q2015 GDP estimate:Ahead of next Wednesday’s National Accounts, today’s weaker-than-expected capex numbers require a -20bp reduction in our 3Q2015 GDP tracking estimate to +0.8%qoq. On face value at least, this is still a relatively solid expansion in activity, but today’s update highlights that the headline increase is masking markedly weaker underlying trends. Specifically, with net exports adding ~1.4pts to GDP in the quarter, domestic demand looks on track for an outright contraction.
We will revisit our estimate on receipt of the remaining partial data on Monday (profits & inventories) and Tuesday (trade and public demand) next week.
Reflecting on the implications of the composition of 3Q2015 GDP for monetary policy, we note that such a large (in part weather-related) boost to growth from net exports is likely unsustainable, yet severe headwinds from the mining capex cycle are expected to remain in place for some time. Indeed, on the RBA’s own forecasts, the adjustment in mining capex is only half complete, with ~3% of GDP worth of mining capex to fall out of the growth equation over the coming years. With the tailwinds from the housing construction cycle starting to fade, population growth slowing and public demand constrained by Australia’s public finances – it is hard to find a sustainable offset to the capex headwind elsewhere in the economy. While it is true that LNG export volumes will ramp-up over time, the trend has been towards project delays and the shipments will be delivered into a very weak price environment in any case.
Overall, we remain concerned about the growth outlook in Australia. Notwithstanding, a reported improvement in surveyed business conditions, there is nothing in today’s update to comfort the RBA that this is translating to anything concrete on the investment front. In turn, we see material downside risks to the RBA’s forecast reacceleration in GDP growth to a +3.0%yoy rate by the end of 2016. To the degree growth continues to fall short of the RBA’s expectations, the prospect of further easing will remain on the table.