Australia | Nov 23 2009
By Greg Peel
Economists have been recently oscillating on their views as to whether December will bring a third consecutive 25 basis point rate rise from the Reserve Bank of Australia. Initial belief gave way to some doubt as to whether the RBA might decide to pause, and mixed data releases since have led to some to-ing and fro-ing. Recent positive data have tipped the balance back in favour. These include an upgrade for Australia’s economic recovery expectations from the OECD and a downgrade of the government’s unemployment peak expectation.
An important economic data release is due on Thursday nevertheless – one that does have the power to tip the balance. A poor reading on third quarter capital expenditure (capex) and expenditure intentions may be enough to make the RBA think twice.
Numbers for third quarter capex (July to September) are now pretty old and there’s been a fair amount of water under the bridge in the subsequent couple of months. But the release includes both this lagging indicator and a leading indicator in the form of capex intentions. The Australian Bureau of Statistics surveys businesses as to how much they think they might commit to spending in the fourth quarter. It is this number the RBA will be more interested in.
Of course, it’s not a commitment as such, so one still has to be wary of the ultimate “conversion ratio” of spending intentions into actual spending. Thus the lagging third quarter numbers will make for an interesting comparison against the then leading June quarter stated intentions.
Economist consensus has the net capex end result for 2009 coming in at a negative 3.9% before turning around to 0.3% growth in 2010. Commonwealth Research is expecting business capex to have fallen by 4.0% in the third quarter after the fall of 3.3% recorded in the second. While this implies a falling pace of growth, the June numbers were subject to peak government stimulus and therefore misleading. CommResearch indeed believes economic consensus on 2010 will prove pessimistic due to recent factors.
An important factor is capacity utilisation, which in the October data had returned to average. This measures the amount of industrial output capacity (eg factories) lying idle, as well they might following a GFC. CommResearch notes, however, that this pace of return to average is actually faster than that of the mild 2000-01 recession. The RBA takes utilisation very seriously when making inflation predictions. Slack in output is disinflationary.
Recent business investment (as opposed to actual capital expenditure) numbers have remained stoically weak despite increasing business confidence, which is again a factor taken into consideration by the RBA. But CommReseacrh notes the government has revised its expectation for an FY10 fall in business investment all the way back from 18.5% to only 6.5%, suggesting the trend has turned.
Add this all up, and expectations are that third quarter capex numbers could confirm this trend and capex intentions more so. Economists note there are potentially a lot of projects which were put on hold during the worst of the downturn and as conditions have now improved it is not a big leap to see them come back into contention. There may be some sectoral divergence in this week’s numbers, however, given it is the mining and energy sectors which are really firing up again.
And top of that list is Gorgon LNG, with other LNG projects set to spark an explosion in capex down the track as well. Iron ore and coal projects are also back into ramp-up mode and the RBA is expecting significant growth in Australia’s exports from continuing growth in Asia’s urbanisation and industrialisation.
The conclusion from CommResearch is that Thursday’s numbers will probably do little to prevent another RBA rate rise in December. Even though the lagging figure may look weak on face value, the leading figure is expected to be strong.