The new capital expenditure figures released last week continue to reinforce that the mining boom is done and dusted, and that the transition from the boom continues at a slow pace. The budget measures designed to spur investment by small business as yet don’t appear to have had much impact, but there are some small signs of improvement.
Capital expenditure is essentially spending done by the private sector on infrastructure, buildings and machinery and equipment. So when companies are increasing their investment in such things, the signs are generally good. Not only will companies need to employ someone to construct the buildings and structures, they will also need people to use the machinery and equipment.
So it is not great to hear that in the June quarter, total private new capital expenditure fell in trend terms by 3.9%, and was down 10% on where it was a year ago:
The quarterly and annual falls were both the worst since the depths of the 1990-91 recession.
The trend figure has now fallen for 12 consecutive quarters, breaking the record for the longest such streak also set during the early 1990s recession.
Clearly it’s not a good thing when you keep comparing things to the deepest recession in the past 70 years.
But the reasons for the collapse are not due to Australia being in a recession; it is purely due to the end of the mining boom. And regardless of what you might hear about Australia’s competitiveness, high labour costs, or sovereign risk, the reason is the collapse of the iron ore price:
The fall from about US$135 a tonne in 2013 to now hovering between US$50 and US$55 a tonne has been reflected in the fall in investment in the mining sector.
Earlier this month, mining investment consultants Behre Dolbear listed Australia as the second best place in the world for mining companies to invest. This was the same place as we were listed in 2014, but oddly one place lower than we were in 2013 when we had both a carbon price and a mining tax.
The mining investment boom was all about buildings and structures – essentially building mines and railways and ports. While certainly the industry invests in equipment, the big money is in construction. And this is reflected in the figures as well which show the investment in building and structures down 5.3% in the quarter, and machinery and equipment down 0.8%:
What this has meant is that overall investment in the non-mining sector is now larger than in the mining sector:
That is not to say the mining sector is now unimportant. Investment in the mining sector is only less than the non-mining sector because that sector includes “non-mining” industry.
When you break the spending down in to individual industries, in the past year the mining industry had six times as much investment as occurred in the second highest industry of transport, postal and warehousing:
But given there is little we can do about the iron ore price, the real focus is on the non-mining sector. And certainly that was the focus in the budget of the $20,000 instant asset write off. This was aimed squarely at encouraging small businesses in the non-mining sector to buy machinery and equipment.
The immediate signs are, not surprisingly, weak. The June quarter would have only included about six weeks for any businesses to take advantage of the tax changes and thus it’s no shock, nor sign of failure, that spending on machinery and equipment was down 0.8% in the June quarter.
The important aspect for judging the performance of this policy is the estimates for investment for the 2015-16 year.
The ABS gathers six estimates of investment spending for each financial year. The first estimate is made in January and February (ie in January 2015 an estimate is made for spending in 2015-16), the third occurs in July-August and is the latest one we have available.
As a general rule the third estimate is greater than the second (unless something unexpectedly bad occurs), and certainly in the non-mining sectors the third estimate for money spent on machinery and equipment has always been greater than the second such estimate:
Last Thursday the treasurer, Joe Hockey, focused on these estimates when he tweeted: “Today’s Capex figs show $4.5b improvement in expected investment in non-mining sector this financial year. Budget measures having +ve impact.”
He is right that there was a $4.5bn increase in expected investment in estimate three compared with estimate two. But he does fail to mention that the expected investment is still 5.1% below the same estimate made this time last year.
But partly that is because 2014-15 was an OK year for the non-mining sector investment wise. After a flat 2012 and 2013, in the middle to end of 2014 things were looking to be picking up – which is why the estimate done a year ago was actually pretty optimistic:
But while non-mining investment grew in the June, September and December quarters last year, it has fallen since then. Investment in the latest quarter was 1.1% below that of December.
So certainly compared with last year things are not looking good. The May budget predicted non-mining investment in 2015-16 would grow by 4%, so a 5.1% fall is not what is desired – especially given the budget also predicted mining investment would fall by 25.5% and the third estimate for mining investment is 37% below that made this time last year.
But where Hockey has a point is in the improvement from the second estimate. Now yes there is usually an improvement, but the 17% jump in the estimated investment for machinery and equipment in the non-mining sector is the biggest such improvement in the past four years and the third biggest ever recorded.
Thus Hockey has a fair claim to say the budget measures have had an impact on investment. The question, however, given the fall in mining investment is greater than expected, and the overall investment in the non-mining sector looks set to be much lower than last year, is whether the improvement will be enough.
Hockey can claim the non-mining investment picture is a bit rosier than it was three months ago, but the more accurate way of putting it might be to say it is bad, just not as bad as we thought it would be.
