Australia | Nov 25 2010
By Greg Peel
Yesterday in Australia saw the release of September quarter construction work done and today September quarter private sector capital expenditure and expenditure intentions. Both sets of numbers surprised. Both led to forecasts downgrade to Australia's quarterly GDP result next week. ANZ fears that result might actually be negative.
As part of its post-GFC fiscal stimulus package, the Australian government launched a public infrastructure campaign which has now all but wound down. Unfortunately the disastrous insulation and schools programs were the mainstay of the stimulus, but money was spent nevertheless. Economists had assumed that over the course of 2010, private sector construction would quietly ramp back up from its GFC absence to replace the winding down of public construction. To that end, economists had expected a net figure on construction work done in the September quarter to show about 2.0% growth on the June quarter.
Economists had also been expecting a bumpy road, rather than a smooth transition, but they were still surprised by the 2.1% fall. Construction represents around 16% of GDP, and the fall takes around 0.3 of a percentage point off economists' estimates for Q3 GDP. The weak result was predominantly driven by the 6.1% drop in residential building work.
Given the June quarter saw an 8.7% increase in same, economists note the greater impact of higher interest rates and lack of earlier home buyer stimulus than previously expected. Says ANZ, “Today's data suggest a risk that out forecast downturn in housing over the next 18 months could be even deeper than we initially expected”.
Engineering work also surprised with a 1.4% contraction, with public engineering work falling 3.7%. Overall, net public construction fell 2.5%. Economists had expected a fall, but this bigger than expected fall weighed heavily on the net result.
Net private construction work fell 3.4%, which is a big turnaround from Q2's 5.1% increase. The only bright spot was a 1.5% increase in non-residential construction, but ANZ noted that non-res approvals outside the resource sector have fallen considerably so “dark clouds” loom over the Q4 number (ex-resources).
Westpac notes, nevertheless, that the Q3 result seemed to be devoid of some construction suggested by earlier work pipeline figures (ie work approved and near ready to go). This should catch up in Q4. Work at Gorgon, for example, is only now starting to ramp up. Yet Westpac still suggests that the positive trend in construction emerging in Q2 has faltered in Q3.
And so it was on to the Q3 capital expenditure numbers. They were again a surprise, this time to the upside.
Q3 capex increased by 6.2% when economists had expected around 3%. ANZ suggests this number would have been “met with broad smiles” at the RBA, given the “mining boom” spending numbers contained within. However, there is a bit of a twist in the tale.
Capex data are split into spending on building and structures and spending on equipment. Only the equipment capex number is taken into account within the GDP calculation (represents around 7%) given buildings and structures are already captured by the above construction data. We already know that number was weak.
Why then did the capex figures show a 13.4% increase in building and structures? The equivalent number in the earlier data series was flat. Economists are left wondering. (How did Mr Disraeli put it? There are lies, damned lies…)
However a 13.4% figure came about, it was the sole driver of the surprise 6.2% net result. Curiously, equipment capex fell 1.1%. This is not really consistent with “mining boom” expectations. But it is the only number which will be used in the GDP calculation, so the past two days' statistics both represent required GDP forecast reductions.
Westpac began the week with expectation of Q3 GDP growth of 0.6%, but has now dropped that to 0.3%. A less bullish ANZ began with 0.1%, but has now dropped that to “flat”, with the risk the number might actually be negative.
There was nevertheless no surprise that the bulk of overall strength in the 6.1% total capex figure came from the resources sector, with a 15.6% rise. This is the sort of number the RBA is latching onto, ever more desperately it would seem.
And adding grist to the RBA's mill is the survey of FY11 capex intentions. The survey taken in the September quarter implied a 21% annual growth rate in capex (assuming intentions are all converted, which is a “perfect” result). But that number is actually down from the 28% growth rate implied when the same survey was conducted in the June quarter.
Of course, those numbers are all about mining too.
Perhaps most interesting was Westpac's summation of why, all elements included, its Q3 GDP forecast is now only 0.3% (ANZ 0.0%):
“The partials show housing activity contracted, business investment was probably flat, public investment most likely declined and net exports are likely to subtract from growth. That just leaves the consumer, public consumption and inventories to drive growth.”