Australia | May 27 2010
By Chris Shaw
Australian private capital expenditure for the March quarter has fallen short of market expectations, the decline of 0.2% for the period coming in well below the consensus forecast of a rise of 2.5%.
Breaking down the numbers, Westpac notes equipment capex declined by 6.0%, a fall in line with its expectations given the December quarter number was inflated by temporary tax incentives.
Mining capex rose by 2.6% for the quarter, ANZ economist Katie Dean noting this was the first increase in this measure since the December quarter of 2008. The strength here was offset elsewhere though as Dean notes manufacturing capex in the period declined by 14.7%.
While the overall capex number was weak Dean suggests the figures are unlikely to cause too much concern, as not only was the December quarter inflated by temporary policy moves but there are signs of an inventory rebuild underway.
This is implied by a sharp fall in spending on equipment, plant and machinery despite strong capital imports in the quarter, such an inventory rebuild being typical of the start of an investment upswing in Dean's view.
According to Dean the numbers confirm Australia is still on track for an investment boom, with mining sector investment forecast to rise from $37 billion in FY10 to $46 billion in FY11. Her forecasts are supported by her expectation manufacturing capex will increase by 9.4% rise in FY11, which is an 18.3% upward revision from the estimate in the December quarter.
Westpac also expects total real business investment in Australia will rise, though its forecast calls for an increase of around 10% in 2010/11. The reason is the Gorgon project is currently included in estimates for 2010/11, making it unreasonable to expect investment plans to be progressively upgraded.
Today's capex number has caused ANZ to revise down its GDP forecast for the March quarter for Australia due next week. The bank now expects GDP growth of around 0.6%, with all of the growth to come from the income side of the accounts thanks to the strong labour market.
Dean suggests the expenditure side is at risk of turning negative in the quarter given flat retail sales volumes and relatively large drops in private investment. Strong government spending and a private sector inventory build will be needed to save GDP from an even weaker outcome in Dean's view.
Westpac is forecasting March quarter GDP of 0.4%, which is unchanged on the back of the GDP data given equipment capex and construction work data from yesterday were in line with its expectations.
The Australian dollar softened on the back of the weaker than expected capex data and Westpac continues to suggest playing the currency from the short side. Rallies above USD0.835 are a good level to re-establish shorts in the bank's view.
