The Bull

Thursday 18

October, 2018 7:55 AM



Business investment

Business investment

New business investment (spending on buildings and equipment) rose by 0.4 per cent in the March quarter to be up 3.7 per cent over the year

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31.05.2018 03:55 PM

Record services sector investment

 
Slowest growth of bank deposits in 26 years
Business Investment; Private sector credit

Investment up modestly: New business investment (spending on buildings and equipment) rose by 0.4 per cent in the March quarter to be up 3.7 per cent over the year – just short of the best growth in five years.

Non-mining: Services sector investment hit a record high of $72.2 billion for the year to March.

Expected business investment: The second estimate of investment in 2018/19 is $87.74 billion and is 1.4 per cent higher than the second estimate for 2017/18. Expected investment by non-mining and manufacturing firms has never been higher.

Lending & money: Private sector credit (effectively outstanding loans) rose by 0.4 per cent in April after a 0.5 per cent rise in March. Credit was up 5.1 per cent over the year. Bank deposits rose just 2.5 per cent over the year to April – the slowest growth in 26 years.

China purchasing managers indexes: The National Bureau of Statistics’ manufacturing purchasing managers’ index rose from 51.4 to 51.9 in May, above market forecasts for 51.3 points. The services gauge rose from 54.8 to 54.9, above consensus expectations for 54.8 points. Results above 50 points imply expanding activity. 

What does it all mean?

Aussie business conditions are the best in a decade and profits are near record highs. Strong synchronised global growth is supporting business activity. The non-mining sector is investing and businesses are expected to spend even more over the coming year. Jobs are being created and wages are finally lifting for some workers.

Services sector spending hit fresh record highs in the year to March. Overall business expectations are the most positive in six years. And expected services sector investment has never been higher. It is important to remember that the Bureau of Statistics survey of investment excludes a number of key sectors such as healthcare, education, the public sector and agriculture. So business spending and expectations for future investment are likely to be stronger than reported today.

Business spending is especially strong in NSW and Victoria with non-mining investment at record levels in both states.

Aussies are putting their money somewhere but it’s not in the bank. Bank deposit growth hasn’t been slower in a quarter of a century, same for the M3 and Broad Money measures of money supply. This is very much a low interest/low inflation environment. And clearly interest rates are going nowhere is a hurry.

What do the figures show?

Private business investment

Overall: New business investment (spending on buildings and equipment) rose by 0.4 per cent in the March quarter to be up 3.7 per cent over the year.

Spending on buildings fell by 1.3 per cent in the quarter, but spending on equipment rose by 2.5 per cent. Investment was up 3.7 per cent over the year with buildings down by 0.6 per cent, while equipment was up by 9.3 per cent.

Sectors: Mining investment rose by 1.2 per cent in the March quarter, but manufacturing spending fell by 3.3 per cent and spending by “other selected industries” rose by 0.5 per cent.

States: In seasonally adjusted terms investment rose in five of the eight states and territories in the March quarter: NSW (up 2.3 per cent); Victoria (up 1.1 per cent); Queensland (down 1.2 per cent); South Australia (down 10.9 per cent); Western Australia (down 0.2 per cent); Tasmania (up 33.1 per cent); Northern Territory (up 1.2 per cent); ACT (up 4.6 per cent).

Prices: The overall deflator for investment goods rose by 0.3 per cent in the March quarter after a 0.2 per cent rise in the December quarter. The cost of buildings and structures rose by 0.4 per cent while the cost of equipment rose by 0.3 per cent.

Over the year, the cost of investment goods rose by 0.7 per cent – a near 2-year high. The cost of buildings rose by 2.0 per cent. And the cost of investment equipment fell by 0.6 per cent – the annual growth rate has been declining for seven consecutive quarters.

Forecasts: The second estimate of investment in 2018/19 is $87.74 billion and is 1.4 per cent higher than the second estimate for 2017/18. The sixth estimate of investment in 2017/18 is $117.5 billion and is 3.8 per cent higher than the sixth estimate for 2016/17.

Private sector credit

Private sector credit (effectively outstanding loans) rose by 0.4 per cent in April after a 0.5 per cent rise in March. Credit was up 5.1 per cent over the year.

Housing credit grew by 0.4 per cent in April and has risen 0.4-0.5 per cent a month over the last 11 months. But annual growth eased from 6.1 per cent to 6.0 per cent – the lowest growth rate in four years.

Owner occupier housing credit rose by 0.6 per cent in April to stand 8.0 per cent higher over the year.

Investor housing finance lifted by 0.1 per cent in April with annual growth easing to a 19-month low of 2.3 per
cent. 

Personal credit fell by 0.3 per cent in April to be down 1.2 per cent over the year.

Business credit rose by 0.5 per cent in April with annual growth at an 8-month high of 4.3 per cent.

M3 fell by 0.3 per cent in April and Broad Money fell by 0.2 per cent. M3 is up just 2.5 per cent on the year and Broad Money is up 2.6 per cent on the year (both 25½-year lows).

Term deposits with banks rose by $0.4 billion to $581.7 billion in April. Annual growth fell from 3.4 per cent to 3.2 per cent.

Loans and advances by banks grew by 5.2 per cent in the year to April. And loans and advances by non-bank financial intermediaries rose by 7.0 per cent over the year, down from a 9½-year high of 7.1 per cent in March.

What is the importance of the economic data?

“Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.

Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

China’s National Bureau of Statistics releases its monthly economic statistics around mid month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

The data on private business investment complements solid government spending on infrastructure and commercial construction activity. Investment is especially strong in the services sector, buying the outlook for builders, equipment suppliers and distributors and sellers of computer-related goods.

Expected investment by non-mining and manufacturing businesses has never been higher, highlighting the good prospects for firms servicing the business sector.

Credit and money growth remain sluggish, keeping inflationary pressures at bay.

CommSec expects official interest rates to remain on hold until 2019.

Published by Craig James, Chief Economist, CommSec
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