Australian managers more upbeat about investment

Australian managers more upbeat about investment spending plans for 2009-10

The main message in today's business investment survey for the June quarter is that managers are feeling more optimistic about the outlook, both locally and offshore, but still plan to rein in investment spending, albeit modestly and only in the near term. Unofficial industry and private survey evidence indicates that the investment pipeline is swelling, particularly in mining (and in the oil and gas sector, in particular). If today's official survey is to be believed, however, much of this investment will occur after June 2010. In the near term, a big rise in promised public spending on infrastructure should help to plug the gap left by a pull back in private spending. The transition, though, will not be seamless, so we should expect some lumpy outcomes in coming surveys.

Based on today's data, private investment spending looks likely to fall by up to 10% in the year ended June 2010, a significant upward revision from the 20% fall implied by the March survey. The minutes from the RBA's August Board meeting, released last week, indicated that investment will fall significantly as a share of the economy in 2009 and 2010, but today's data suggests the drag will be more modest, even in absolute terms. Investment is one of the main drivers of job creation in the economy - the still cautious attitude of many managers means the jobless rate will continue to climb - but the resulting squeeze on labour income may not be as severe a headwind for households as we previously thought.

The Bureau of Statistics collected firms' responses to the latest investment survey over the last eight weeks, during which business sentiment rose significantly. While the early responses probably were more downbeat (90% of the responses were received by the end of July; 60% were received by mid-July), there likely was a gradual improvement in the optimism of responses as the better news on the global and domestic economies rolled in. The 10% of responses received in August probably painted a much more upbeat picture, given the avalanche of good news in recent weeks. The final June quarter survey outcome, therefore, probably overstates any weakness in manager's contemporary expectations for spending.

In the June quarter, investment spending unexpectedly rose 3.3%q/q in real, seasonally adjusted terms (JPMorgan -3%, consensus -5%). The pattern across industries was the opposite of what we had expected. Spending in manufacturing rose 4.6% and there was a gain for other industries of 9.8%. Investment in mining, which should have been the main beneficiary of strong demand from China, unexpectedly fell 6.3%q/q. It is clear, though, that managers' longer term plans for investment in mining have improved significantly in recent weeks. Investment in equipment, plant and machinery rose 5.3%q/q in Q2 (helped along by the government's expanded investment allowance, which dragged forward spending from Q3), while spending on buildings rose just 0.7%.

The rise in spending on machinery and equipment in today's report feeds into our calculations for June quarter GDP growth (the data is released next Wednesday). At this stage, we expect a healthy gain in real GDP of more than 1%q/q, with the boost from engineering and equipment investment helped along by firm household spending, higher public spending and another rise in export volumes. Much of the Q2 boost to GDP, though, is a response to aggressive, but temporary, policy stimulus, which will not be a source of support in Q3. We anticipate, therefore, that GDP will fall slightly in Q3. We have however, upgraded expected GDP growth for 2010 on the back of the longer-term swelling of the investment pipeline.

Firms' third estimate of spending for the year ended June 2010 was much higher than we anticipated at A$90.6 billion (JPMorgan $81 billion). After the usual adjustment for estimation errors (using realistic realization ratios, rather than the conventional five-year averages, the use of which tend to overstate actual investment outside cyclical upswings), there is likely to be up to a 10% fall in spending across the fiscal year. (Using the conventional five year average realization ratio yields a modest 2.5% rise for 2009-10 - see chart). The seventh and final estimate of firms' spending in the year ended June 2009 printed at A$101.1 billion, a 16.9% rise on spending in the year ended June 2008.

According to recent commentary, RBA officials expect investment to be a drag on the economy this fiscal year, but today's survey failed to endorse this perception. Today's data, therefore, strengthens the case for an earlier withdrawal of policy stimulus. There remain, though, important questions to be answered before the RBA moves. The key milestones will be the consumer related indicators, which will show how households are holding up in the absence of new stimulus. We anticipate a softening in the data in the near term, which should give RBA officials time to assess how other uncertainties, like the resilience of global demand, are resolved. Only if the consumer-related data fails to cool in coming months can we contemplate an RBA rate hike before the end of 2009.

ENDS

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