Capex expectations have fallen off a cliff – and they could take jobs with them
|
Version 0 of 1. The capital expenditure figures released last week were the type of economic data that sends a chill though the economy. If any data released by the ABS can be scary, these were it, as hopes for a “soft landing” from the mining investment boom were obliterated. The figures also demonstrate the government needs to start spending as much time developing an industry policy as it seems to be devoting to thinking about cutting benefits. Capital expenditure (capex) covers the investment in things such a buildings, equipment and machinery. If an industry is investing in more of these then it means more mines, factories, etc are being built. At first glance the figures don’t look too bad. In trend terms capex in the December quarter fell by only 0.7%, and by 2.7% annually. A 2.7% drop, of course, is not good, but on the whole it suggests a bit of a glide down from the peaks of the mining boom, rather than a crash. Most of the decline came via the mining sector – which makes up nearly 60% of all capital expenditure. Mining investment declined 3.9% from December 2012 to December 2013, but this decline was less than was observed in the 12 months to September 2013. The manufacturing sector investment also declined over the 12 months to December 2013 – by 9.3% – but again this was much better than what had occurred in 2012-13 where at times it was declining by 28%. So far, seemingly so good. Not great, but things could be worse. And then, upon further inspection, we see that they are worse. The capex figures also provide information on expected expenditure. Seven estimates are provided, the first of which is done 18 months beforehand. Thus the latest figures provided the first estimate of what capital expenditure is expected to be for the 12 months to June 2015. And it ain’t pretty. If we focus on mining, we see the expectation for investment in 2014-15 is 25.2% below what the first expectation for such investment was in the 2013-14 year: That is the biggest annual drop in mining capex expectations since 2000, and the second biggest fall since the ABS began compiling these figures in 1988. Overall, the initial expectation for total capex in 2014-15 is 17% below what was first expected in 2013-14 – the biggest such drop recorded in the data. The chill such a drop in expectations brings to the economy is obvious when you compare initial expectations of mining capex with the actual result: The actual capex has held up OK, but the problem is that it only shows us the past, while the expected figure shows us the future – and it is a future where mining investment in 2015 could be at 2011 levels – i.e. going back four years. The picture in manufacturing is no better. The initial estimate for manufacturing capex in 2014-15 is 19% below what was first expected for 2013-14. That annual drop is not so bad as the 24.3% drop that was expected for 2013-14, but if it comes to fruition it will see manufacturing capex at 46% of the level it was in 2009-10: It would also see manufacturing investment as low as it has been for 25 years. This all means don’t expect the corner to be turned soon. The figures are a blow to the relatively upbeat expectations for economic growth in the Reserve Bank’s recent statement of monetary policy. It doesn’t mean that a recession is on its way, because the mining boom is still there – it is just now more about exporting iron ore and other minerals than it is about building new mines. The income and GDP garnered from exports will continue to flow into the nation’s coffers. But as we’ve pointed out regularly, the investment boom is the one that leads to employment growth – because you need people to build those buildings, structures and to use that new equipment. And, with this expected decline in investment, hopes for a pick-up in employment will have to come from industries less reliant on massive capital expenditure – namely the services sector. And while we might hope that these expectations are overly gloomy and things might pick up in the next 18 months, it is worth noting that 2012-13 was the first time that the actual investment expenditure was below that of the first estimate: The trend does not suggest companies are being over-pessimistic. Let us hope they are not actually being overly optimistic. |