Australia | Aug 27 2009
By Rudi Filapek-Vandyck
Economic data in Australia continue to record (much) better outcomes than economist expectations. Today’s release of new capex spending by private enterprises in the second quarter has not proved an expection. Following on from yesterday’s surprise from the construction market, economists have started to lift their forecasts for second quarter GDP growth, while noting the Reserve Bank will be paying close attention.
New capital spending rose by 3.3% in the second quarter of 2009. This compares with a market consensus prior to the release of an anticipated fall of 5%. Commonwealth Bank economists, who had been anticipating a fall of 8% for the quarter, note today’s better-than-expected result is likely to feed through into rising market expectations for next week’s GDP growth release. CBA has already done the inevitable and raised its own GDP growth estimate to a positive 0.7% outcome. Yesterdays stronger than anticipated construction data contributed to the move as well.
CBA notes spending remains 4.4% above year-earlier levels, while pointing out the much anticipated pause in mining expenditure appears to be a short lived phenomenon plus whatever there was in pause has been subsumed by a stimulus driven boost in manufacturing and investments by small businesses.
ANZ economists were already forecasting GDP growth of 0.7% in Q2. They now believe this estimate may prove too conservative. Drawing positive conclusions from today’s surprisingly strong release, ANZ economist Riki Polygenis suggests “the key expected drag on economic activity over the next year will be much less severe (and perhaps will not be a drag at all.)”
National Australia Bank senior economist David de Garis agrees with all of the above, but prefers to wait for a few more data releases, before possibly changing his current 0.5% Q2 GDP growth estimate. One thing is clear, states de Garis, the Reserve Bank’s own estimate of 0.25% growth for the quarter now seems too low.
Notes de Garis: “Not only was capital spending strong in the quarter, but spending is expected to rise further in 2009-10. Expectations for the current 09-10 financial year were nudged up to a rise for the year of 3% up from a higher base with spending up 16.9% in nominal terms in this just completed financial year. Part of this no doubt may have been in response to the 50% depreciation allowance but we’d also note that the strongest expectations were in the Mining industry where spending is dominated by the large resource companies.”
Economists at Westpac raised their Q2 GDP growth forecast to 0.7% from 0.4% previously.
We leave the final words to economists at Commonwealth Bank:
“Whilst it is now widely acknowledged that the domestic outlook is much more positive there is another emerging story in today’s data. With the private sector retreat not as significant as initially anticipated the stimulus-boosted rise in public capital spending may prove uncomfortable as the economy’s momentum improves.
“Much of the impact of the infrastructure investment side of the stimulus package is only beginning to be felt in the economy. An earlier than expected recovery in mining, and broader business investment, could exert demand on the economy’s resources at the same time as the stimulus packages main boost.
“With a meaningful decline in underlying inflation still an expectation, rather than a reality, such a scenario would provide a significant threat to our current expectations for the RBA to remain on hold rates at emergency lows out until QI 2010.”
Capex spending for the first quarter was revised to a 7.3% contraction (revised up from a previously reported minus 8.9%).