Sep quarter capex declines; 2022 looking better

Summary: Private capital expenditures down 2.2% in September quarter; largely in line with expected figure but in contrast with June’s + 3.4%; largest falls in NSW, ACT; 2021/22 capex estimate 8.7% higher than previous estimate, 14.2% higher than comparable estimate from 2020/21; higher capex forecast suggests firms shrugging off lockdown impacts.

Australia’s private capital expenditure (capex) spiked early in the 2010s on the back of investment in the mining sector. As projects were completed, capex growth rates fell away and generally remained negative for a good part of a decade. Capex as a percentage of GDP is now back to a level more in line with the long-term average.

According to the latest ABS figures, seasonally-adjusted private sector capex in the September quarter declined by 2.2%. This latest figure was largely in line with the 2.4% contraction which had been expected but in contrast to the June quarter’s revised figure of +3.4%. On a year-on-year basis, total capex increased by 12.9% after recording an annual rate of +11.7% in the previous quarter after revisions. “The largest drops were in New South Wales and the Australian Capital Territory, confirming that the Delta lockdowns contributed to the weakness,” said ANZ senior economist Adelaide Timbrell.

Commonwealth Government bond yields increased on the day, especially at the short end. By the close of business, the 3-year Treasury bond yield had gained 5bps to 1.22% while 10-year and 20-year yields each inched up 1bp to 1.89% and 2.38%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.04%, remained fairly soft. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May 2022 but then rise to 0.97% by December 2022.

The report also contains capex estimates for the current financial year. The latest capex estimate for the 2021/22 financial year, Estimate 4, is $138.6 billion, 8.7% higher than August’s Estimate 3 and 14.2% higher than Estimate 4 of the 2020/21 financial year.

Timbrell said the higher forecast “suggests firms have shrugged off the short-term impact of the lockdowns…” She expects “a return to strong capex growth in coming quarters.”

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