Q4 investment survey - boom poised to continue

Q4 investment survey - boom poised to continue

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Today’s Q4 investment survey delivered on expectations for further swelling of Australia’s already bulging investment pipeline. Not only did spending bounce in the December quarter, after a drop in the previous quarter, but firms upgraded their spending plans for the year ended June 2010. The revised plans now imply that investment is holding up at elevated levels. More importantly, though, the first glimpse of firms’ spending plans for the year ended June 2011 implies something like an 18% rise on current elevated levels, with new spending in mining leading the way.

Clearly, on this evidence, Australia’s current investment boom, which started in 2005 and is underpinned mainly by soaring demand for bulk commodities in Asia, has much further to run. This fits with industry and anecdotal evidence indicating that many firms have been pushing through approvals of large scale investment projects, mainly in mining, but also in associated infrastructure. It also is consistent with the comments by RBA Deputy Governor Ric Battellino, who this week pointed to the likely extension of the current mining boom.

Today’s upbeat survey, which indicates that the outlook for employment also has brightened significantly, supports our assertion that Australia’s official cash rate remains too low. It does not, however, mean a rate hike next Tuesday is “almost certain” (as was reported in an apparently influential media article) There is a high probability of the RBA raising the cash rate next week – we put the odds as high as 40%. With the RBA Board, however, having elected to be inactive less than four weeks ago, mainly because there was insufficient certainty on how households were coping with the earlier rate rises, it is likely that the RBA will be on hold next week too.

Indeed, we expect the next hike to the cash rate target to come in early April. By then, some of the clouds of doubt hanging over domestic economic conditions – the consumer, in particular - and the developing situations globally, including the evolving sovereign issues in Europe and the apparent loss of momentum in the US, should have lifted sufficiently for Board members to opt to nudge the cash rate a little higher. We expect a steady drum beat of monetary tightening over the remainder of 2010; the cash rate probably will be 5% by the end of the year.

Private investment as a share of Australia’s GDP already is running at 24% of GDP, close to the record high reached towards the end of 2008. If the plans of managers in today’s survey are realised, this ratio will rise to new highs in the next fiscal year. The Deputy Governor this week suggested mining investment alone soon could be 6% of GDP. Indeed, most of the new investment will be in mining, where output is being underpinned by rapidly rising demand for gas, coal and iron ore by China and India, in particular. China now takes more of Australia’s exports than any other country, this share having doubled since 2008.

Investment spending bounced 5.5% in real terms in the December quarter (J.P. Morgan 4.5%, consensus 2.0%), after a 5.2% fall in Q3 (revised lower from a 3.9% drop). Spending on buildings and structures fell for the second straight quarter, but this was more than offset by a 12.7% rise in spending on plant and equipment. Investment in mining fell slightly, the fourth straight quarterly drop, but there was a big rise for manufacturing and a slightly smaller gain in other sectors. Investment ex-mining, therefore, bounced nearly 9% over the quarter.

For 2009-10, the fifth estimate of firms’ spending plans printed at A$110.6 billion (J.P. Morgan A$110 billion). This implies only a 3% drop in spending from the record levels reported for 2008-09. Given the lingering weakness in key economies offshore and plunging investment spending in many other countries, this is a remarkably good outcome.

The first estimate of firms’ spending plans for 2010-11 printed at A$101.4 billion (J.P. Morgan A$100 billion). After adjustment for firms’ usual underestimation of spending plans in the early surveys (using an average estimation error since this survey started in 1987 to avoid giving too much prominence to the recent boom period), spending in 2010-11 probably will rise 18% from 2009-10. Most of the rise will be in mining – firms plan to spend A$49 billion on mining projects in the year ended June 2011, which implies an impressive 40% rise. Managers in manufacturing, though, look likely to trim investment over the same period.

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ENDS

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