Australia | Nov 26 2009
By Greg Peel
Next Tuesday the Reserve Bank of Australia will raise its cash rate by 25 basis points.
Today’s release of third quarter capital expenditure (capex) by Australian businesses looked rather weak on face value, but economists agree looks can be deceiving. For starters, economist consensus on what the result would be was unclear. Westpac, for example, said the market was assuming a 1.0% increase while National Bank believed it was a 2.1% increase. It matters not – put two economists in a room and they would not be able to reach agreement on the colour of an orange.
The result was down 3.9%, which by default was worse than expected. NAB economists said the worse than expected outcome did not surprise them (a logic I always enjoy), while Westpac had expected negative 5.0%. Capex intentions, nevertheless, were up 6% from the previous quarter but down 8% from the September quarter 2008. So down 3.9% is the “was” and up 6% is the “will be”, and the latter is more important to ongoing RBA monetary policy than the former. NAB suggests the intention number 8% lower than last year may look bearish, but really it’s not.
Capex intention numbers are constantly revised before the final figure is released, NAB notes, as the quarter progresses. Clearly expectations are just “gunnas” anyway, and not commitments. Respondees might be coy or full of bravado – it’s hard to tell. NAB notes that the market typically compares the intention number with a five-year average “realisation ratio”, which is some sort of ratio of “gunna” and “did”. And this month’s data release came with a special feature article attached, in which the Australian Bureau of Statistics suggests that five-year realisation ratios are “not considered a sound approach to projecting future capital expenditure”.
NAB agrees, suggesting this “rule of thumb” can be jiggled with respect to today’s numbers to derive a capex growth forecast for 2009-10 of either minus 1.6% or plus 2.0%, depending on how you look at it.
So we might as well all just go home.
Westpac’s take is consistant with the government’s, in that business investment will fall by 6.5% in FY10 and rebound by 5.5% in FY11. The RBA has pointed out in each of its last two “rate rise statements” that business investment is the one weak factor in the economic equation, but that its pace of decline is slowing and a rebound is expected.
In conclusion, see first sentence.