Australian business capex, March quarter
Equipment spending meets expectations as capex plans continue to be upgraded. Q1 Capex: +1.0%qtr; +5.5%yr. 2024/25 Capex Plans: Est 2 $155.4bn; +6.8% vs. Est 1.
Q1 Capex (Actual Spending)
Private business capex rose 1.0% in Q1 2024 following a gain of 0.9% in Q4 2023 (revised up from 0.8%). That was firmer than the market forecast for a 0.7% lift and was below our forecast for a 1.6% gain. While machinery and equipment (M&E) met our expectations, buildings and structures (B&S) was softer than we anticipated. Non-mining capex grew 3.3% in the quarter, well above the pre pandemic average quarterly growth of around 0.5%. This was partly offset by a 4.7% fall in mining capex.
While growth in household spending has flatlined, demand overall remains at a high level. Businesses, who had to put investment spending on hold in the pandemic and struggled once again to expand capacity during various post-COVID supply shocks, still see a need to build their capital stocks. This is helping ease capacity constraints in some sectors, where reported capacity utilisation levels remain above average. It is also allowing the business sector to respond to structural changes and invest in the transition to net zero, for example. Today’s release suggests that businesses expect capex to continue to grow at a decent pace over the next five quarters.
Importantly, we saw the price of machine and equipment fall, the second quarterly fall in the last three quarters. This suggests that the supply chain disruptions coming out of the pandemic have largely been resolved and businesses are taking advantage.
Detail
Compositionally, M&E spending printed broadly as expected, lifting 3.3% in total with the gain in non-mining M&E (+4.6%) more than offsetting the fall in mining M&E (–3.2%). In the non-mining sector, the ABS noted strong lifts in M&E associated with large infrastructure projects (+16% in transport, postal and warehousing) and data centres (+60% in information media and telecommunications).
Meanwhile, B&S spending moderated in the quarter (–0.9%). The gain in non-mining B&S (+1.9%) was unable to offset the sharp decline in mining B&S (–5.2%), with the ABS suggesting a decline in spending across major iron ore and LNG projects was the key culprit. This may offer a partial explanation of the downside surprise in construction activity (see here), but estimates between these two releases can differ.
Across the major states, Queensland was the front-runner (+5.9%), NSW and Victoria shared similar gains (+1.3%) while the mining state of WA clearly declined (–6.7%).
Capex Spending Plans
Today’s release also provided an update on expected capex spending over the next five quarters. Estimate 6 for capex spending in 2023-24 printed at $180.6bn. This was 10.9% higher than the same estimate last year. Estimate 2 for the 2024-25 financial year came in at $155.4bn, around 12.8% higher than the same estimate last year.
When considering how plans translate into actual capex spending, we need to adjust by measures of historical bias. As companies move through the year, they tend to update plans to account for new projects and actual outcomes. As such, plans tend to be downwardly biased in the first few estimates before providing a better guide through later estimates. We apply historical realisation ratios to the estimates, using differing ratios, including the 5-year and long run averages, which have been shown to minimise mean squared forecasting errors.
After applying these ratios, the value of total spending is expected to come in at around $180.0bn in 2023-24 and $195.0bn in 2024-25. This represents an increase of around 9.5% in 2023-24 and 8.3% in 2024-25.
While capex spending across different sectors is expected to grow at roughly the same pace in in 2023-24, there is a divergence in 2024-25. In particularly, non-mining capex is expected to grow by 11.3% in 2024-25, to reach a record high of $144.0bn. Mining capex is expected to remain broadly flat at around $52bn. High levels of capacity utilisation, strong population growth and the need to transition to net zero emissions are all supporting high non-mining capex.
Capex spending plans are nominal and do not account for the impact of price rises. In recent years, price gains have been a more significant driver of overall increases in spending plans. This is now shifting, with the prices of machinery and equipment falling in two of the last three quarters and running at close to pre pandemic levels in annual terms.
Adjusting spending plans for prices suggests that real capex spending may grow by around 5.75% in 2023-24, followed by growth of around 5.25% in 2024-25. In quarterly terms, this implies a modest increase in the June quarter, followed by growth averaging around 1.5% per quarter for the 2024-25 financial year.
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