The Bull

Monday 18

February, 2019 5:24 AM

Strong lift in business investment plans

Strong lift in business investment plans

New business investment (spending on buildings and equipment) fell by 0.5 per cent in the September quarter...

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29.11.2018 04:21 PM

Biggest upgrade to investment plans in 19 years
Business investment

Investment falls: New business investment (spending on buildings and equipment) fell by 0.5 per cent in the September quarter to be down 0.6 per cent over the year.

Non-mining: Services sector investment hit a record high of $73.6 billion for the year to September.

States: NSW business investment rose to a record high of $8.3 billion in the September quarter while Victorian investment of $5.7 billion was a 7½-year high.

Expected business investment: The fourth estimate of investment in 2018/19 is $114.099 billion and is 4.4 per cent higher than the fourth estimate for 2017/18. There was an 11.3 per cent upgrade in investment between the third and fourth estimates – the strongest upgrade in 19 years. 

What does it all mean?

NSW and Victoria remain the powerhouse economies. While mining investment is still easing in Western Australia, Northern Territory and Queensland, the non-mining business spending in NSW and Victoria continues to lift. In fact business investment spending was at record highs for the year to September in NSW as well as the ACT while Victorian investment was a smidgen off new highs.

The good news is that businesses nationally are lifting spending plans. In just the past three months, planned investment spending increased by 11.3 per cent – the biggest equivalent upgrade in spending plans for 19 years.

The latest investment figures are unlikely to include today’s announcement by Rio Tinto of a $3.5 billion investment in the Koodaideri iron ore mine from 2019 that will create 600 permanent jobs.

It is always 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 may prove to be even stronger than reported today.

What do the figures show?

Overall: New business investment (spending on buildings and equipment) fell by 0.5 per cent in the September quarter after a 0.9 per cent fall in the June quarter. Spending is down 0.6 per cent on the year.

Spending on buildings fell by 2.8 per cent in the quarter and spending on equipment rose by 2.2 per cent. Building investment was down by 6.9 per cent over the year, but equipment spending was up by 7.7 per cent.

Sectors: Mining investment fell by 2.7 per cent in the September quarter, but manufacturing spending rose by 2.7 per cent, while spending by “other selected industries” rose by less than 0.1 per cent.

States: In seasonally adjusted terms investment fell in five of the eight states and territories in the September quarter: NSW (up 3.1 per cent); Victoria (up 5.4 per cent); Queensland (down 3.8 per cent); South Australia (down 11.2 per cent); Western Australia (down 0.9 per cent); Tasmania (up 3.5 per cent); Northern Territory (down 25.2 per cent); ACT (down 8.6 per cent).

Prices: The overall deflator for investment goods rose by 0.6 per cent in the September quarter after a 1.0 per cent lift in the June quarter (the biggest lift in 3 years). The cost of buildings and structures rose by 0.7 per cent while the cost of equipment rose by 0.6 per cent.

Over the year, the cost of investment goods rose by 2.2 per cent – the fastest rate in almost three years. The cost of buildings rose by 2.6 per cent – the fast rate in seven years. And the cost of investment equipment rose by 1.9 per cent – the strongest annual growth rate in 2½ years.

Forecasts: The fourth estimate of investment spending in 2018/19 is $114.099 billion and is 4.4 per cent higher than the fourth estimate for 2017/18. There was an 11.3 per cent upgrade in investment between the third and fourth estimates – the strongest upgrade in 19 years.

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.

What are the implications for interest rates and investors?

The economy certainly doesn’t need a kick along with lower interest rates. Underpinned by record profitability, Aussie businesses are expected to lift spending significantly over
the next nine months.

As noted with the construction activity data yesterday, there are rising cost pressures, especially with new building. The cost of building is growing at the fastest rate in seven years. And a softer Aussie dollar is probably to blame for an increase in the cost of new equipment.

CommSec expects official interest rates to remain on hold until later in 2019. But cost pressures will be closely monitored in coming months.

Published by Craig James, Chief Economist, CommSec
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