Australia: Signs of more capex to come – NAB

Analysts at NAB explain that last month’s spike in Australia’s business conditions was completely unwound in the November NAB Monthly Business Survey, although the index remains at very elevated levels.

Key Quotes

“Business confidence has been less volatile, but appears to be showing a modest downward trend. In terms of the read on business investment, capacity utilisation rates were steady (at solid levels), but capital expenditure solidified, consistent with better reads on investment expectations from the ABS.”

“Similarly, despite a decline in the value of non-residential building approvals in October, the trend remains quite positive; up 20% y/y in trend terms (private & public). Office approvals have been particularly strong, albeit lumpy, while trends are generally encouraging in other sectors such as warehouses. Education and retail have seen support from some major projects this year.”

“Underlying private business investment has been heading steadily higher – rising by 2% q/q, which was the fourth consecutive quarter of growth (up 7.5% over the year). Separately released data from the ABS shows that mining has become much less of a drag on investment, holding steady in Q2, while NAB estimates suggest that non-mining investment growth was again solid in the quarter. Private engineering construction saw solid growth of 6.3% q/q, which is likely supported by both infrastructure projects and some residual mining investment. Non-residential building construction rose by only 0.1% q/q, but is up a solid 11% y/y – good trends in non-residential building approvals suggest further growth over coming quarters. Meanwhile, machinery and equipment investment rose by 1.1%, which is a solid result, but softer than Q2.”

“Underlying public investment was up a solid 7.4% q/q, which is consistent with a ramp-up of infrastructure programs – spending was weaker in underlying terms due to the impact of second hand asset transfers (namely the completion of the Royal Adelaide Hospital).”

“Reads on the longer-term outlook for business investment stepped up recently with the ABS Private Capex survey pointing to much stronger non-mining investment in FY18 – coming more into line with solid 12-month ahead expectations in the NAB Quarterly Business Survey. The confirmed pipeline of infrastructure projects is also large, which will keep public investment elevated.”

“Underlying business investment (around 12% of GDP) is forecast to be higher in 2017 (2.8%), accelerating to 4.8% in both 2018 and 2019.”