Australia: Mild upgrade to the non-mining CAPEX outlook on the cards - ANZ

Research Team at ANZ, suggests that Australia’s Thursday’s capital expenditure survey will provide an estimate of actual investment in Q2 and an update on firms’ investment plans for 2016-17.

Key Quotes

“The focus will be on the outlook for non-mining business investment, where we expect a small improvement, pointing to spending falling at a slightly slower rate than implied by the last survey. The mining outlook should remain grim as work draws to a close on the remaining mega projects.

We look for an upgrade to firms’ expected investment in 2016-17, which would still imply a large fall in spending. Revising our initial forecast of AUD96bn, we forecast that businesses will upgrade their plans for nominal investment in 2016-17 from AUD89bn to AUD98bn (market: AUD97bn). When we adjust this for the typical bias in firms’ plans at this early stage of the planning cycle, this implies an 18% fall in spending, compared to the 16% decline implied by last quarter’s survey.

We expect the non-mining outlook will point to a smaller fall in investment. The first two estimates of non-mining spending plans for 2016-17 were disappointing, but we anticipate some improvement in this survey given positive surveyed business confidence and conditions. We forecast expected spending in 2016-17 will be revised from AUD53.2bn to AUD60bn. After adjustment for bias, this would be consistent with investment falling 4%, compared to the 6% decline expected last quarter. As always, note that these estimates exclude spending by key industries, such as education and health, which are counted in the GDP measure of business investment.

In terms of the sensitivity around the non-mining estimate, we would view a revision to more than AUD62.5bn as a positive result because it would point to investment being flat-to-higher in 2016-17. Likewise, we would be disappointed if there was a revision to less than AUD58bn because it would point to a materially larger fall in investment despite otherwise solid business conditions.

Mining investment should continue to slide as the record boom in spending unwinds. We forecast expected mining investment in 2016-17 to be revised from AUD36bn to AUD38bn. In our view, this would point to a roughly 30% fall in nominal investment, consistent with the implied estimate from last quarter’s survey, and following a similar-sized fall in 2015-16. We believe that we are currently experiencing the sharpest drag on GDP from the unwinding of the boom in mining capex, where this subtraction should ease over 2017.

Total capex should fall sharply in Q2. Actual capex is expected to have fallen 6.4% q/q in Q2 (market: -4%) after a 5.2% decline in Q1. Non-residential construction is expected to drive this fall, in line with the sharp drop in mining-related activity seen in last week’s construction work done report. We expect a small 1% increase in equipment spending, which is the only part of this survey that feeds directly into Q2 GDP.”