The Experts

Too early to talk of rate hikes in 2017

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Disappointing business investment data

  • Australian third quarter capital spending data (capex) was disappointing, both for actual and expected capital spending. Capex was 4% lower in September and is now 13.7% lower than in September 2015.
  • Buildings and structures capex was down by 5.7% which shows a continuation of the declining trend in buildings and structures investment since 2012 as the mining investment boom continues to unwind and also validates the outcome of last week’s poor construction work done data.
  • Plant and equipment capex was down by 1.9% and is used as an input into the third quarter GDP forecast. Total business investment in the September quarter GDP number will be quite weak.

Combining the weak capex data with soft September quarter retail sales and weak net export volumes, our current forecasts show a low fourth quarter GDP number of 0.2% quarter on quarter (or 2.5% over the year). There is a real risk of a negative quarterly result, but there are still a few remaining GDP inputs to released next week that will give a better guide to the actual outcome and firm up our forecast. In any event, the broad trend for Australia over the next year is moderate GDP growth around 2.5%.

The key component in Thursday's data was expectations for total capex spending in the 2016/17 financial year, with firms giving their fourth estimate for planned spending.

Expectations are taken throughout the financial year and can therefore change significantly across estimates. The RBA has previously noted that the fourth estimate tends to be the best guide to spending intentions.

In Thursday’s data, expectations for 2016/17 disappointed, totalling $107bn, which was a lift of just over 1% on the last estimate. But, at this stage of the financial year, firms have historically tended to upgrade expectations by more than 1% and as a result, the market consensus was looking for a higher fourth estimate of spending of around $110bn.

Based on a comparison between the latest estimate for 2016-17 investment with that made a year ago for 2015-17 and an alternative approach that adjusts for the usual underestimate of intentions relative to actual business investment, the latest capex intentions data points to a fall in business investment in 2016-17 of around 15% (see the next chart). This will remain a large drag on 2017 growth.

Source: ABS, AMP Capital

The source of disappointment for future capital spending was a large fall in expected mining capex which looks on track to fall another 34% this financial year. Non-mining and manufacturing spending plans lifted moderately.

The continuing decline in mining capex has been well anticipated. What is more disappointing is that non-mining business investment growth isn’t as strong as had been hoped for. 

There are some positive signs – non-residential building approvals have been lifting over recent months and large state capex projects (particularly in NSW and Victoria) will add to growth in 2017. But non-mining capex growth really needs to lift more decisively to see a sustained pick up in Australian economic growth.

The good news though is that mining investment is becoming a smaller and smaller share of GDP and so the impact of its slump on the economy is becoming less significant and by the end of next year its likely to have fallen back to around 2% which is in line with its longer term share of economic activity (see the next chart).

In other words we are getting close to the end of the mining investment slump.

Source: ABS, AMP Capital

The other data out [on Thursday] was the CoreLogic dwelling price series, which showed that nationally, dwelling prices were by up 0.2% in November.

Melbourne prices showed a noticeable decline (-1.5%) in the month driven by lower unit prices. Strong apartment construction in Melbourne over the past year means that unit prices could come under more downward pressure over the next few months.

Sydney prices remain firm (+0.8%) and auction clearance rates are still tracking just under the 80% level, but as more new construction comes online, price growth at these levels is unlikely to be maintained in 2017. Over the next few years apartments in oversupplied parts of Sydney are likely to fall 15-20% in price, but declines in the overall housing market are likely to be more moderate.

Source: ABS, AMP Capital

Implications

There are several growth headwinds for the Australian economy in 2017 – continuing declining mining capex, soft non-mining business capex growth, weakening residential investment growth and slowing housing prices which all point to the likelihood of lower GDP growth in the short term and the risk of a sovereign rating downgrade.

Coupled with downside risks to inflation driven by record low wages growth, it’s way too early to be talking about rate hikes in 2017. In fact, we are still allowing for another rate cut in the first half of next year. Yes the RBA doesn’t want to cut rates again, but it hasn’t really wanted to cut rates over the last few years either – but it has had to.

Published: Friday, December 02, 2016

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