Australia | Feb 26 2009
By Chris Shaw
Economists had predicted Australian capital expenditure in the December quarter would fall by as much as 3.0%, but the data surprised on the upside. The number for new capex came in at an increase of 6.0%, driven largely by a strong rise in building and structure expenditure.
Factoring in the data, ANZ Bank senior economist Katie Dean notes investment expectations for the quarter in year-on-year terms show a 17% increase, down from 27% for the previous quarter. However, Dean suggests this is a more resilient outcome than expected given the current economic headwinds.
As Commonwealth Bank chief economist Michael Blythe notes, the data mean total capital expenditure has risen more than 260% from its low point in 2001/02, while the capex share of GDP has risen by around 2% in the same period.
While the number was a solid outcome for the period, Blythe suggests it nevertheless revealed some scaling back of capex expectations relative to previous surveys. Dean estimates while investment expectations have been marked down, most projects are being pushed back rather than simply cancelled.
Dean suggests while initial reads for capex this year and in 2009/10 suggest increases of 17% and 10% respectively, these will be scaled back. Using recessionary realisation ratios, they are likely to end up closer to 10% this year and a fall of 14% next year. Westpac senior economist Andrew Hanlan agrees expectations will be revised back following today’s data, but as Blythe points out, even while the numbers are being scaled back, today’s outcome was nowhere near as bad as some had expected.
In the view of Dean, today’s data lend some support to the view the Australian economy will avoid negative growth in the December quarter and post the release, she makes no change to her forecast of a flat GDP outcome for the period. Hanlan is more optimistic, lifting his forecast for GDP growth for the quarter to 0.5% from a previously anticipated fall of 0.1%.
Blythe wants to see upcoming company profit, balance of payment and government spending data before finalising his GDP forecast, but he suggests on the data released to date the odds are lengthening on the economy posting negative GDP growth in the December quarter.
With respect to interest rates, Dean thinks today’s capex outcome is likely to add to the Reserve Bank of Australia’s (RBA) view it has done enough with respect to monetary policy at this point in the cycle. There may be a further 0.25% cut, but a pause is just as likely, she suggests.
TD Securities senior strategist Joshua Williamson agrees and sees increased risk the RBA pauses next month, especially as the previous cuts were designed to get the reserve bank ahead of the cycle before the slowdown took hold in earnest.