CAPEX lifts, but businesses clearly pulling back on their plans
Capex spending firmer than expected, with 2024-25 capex plans revised lower. Q2 Capex: 1.1%qtr; +1.0%yr. 2024/25 Capex Plans: Adjusted Est 4 $189.9bn; vs. Adjusted Est 3 $193.7bn. Non-mining capex in real (or price adjusted) terms expected to grow 2.7% in 2024-25 (down from the 5.7%yr expected last quarter), while mining capex expected to fall 1.3% in 2024-25 (broadly in line with last quarter).
Australian business capex, September quarter (actual spending)
Private business capex grew 1.1% in Q3 2024, to be 1.0% higher in annual terms. This was a touch firmer than Westpac’s forecast of 0.9%qtr and the median market forecast for a 1.0%qtr lift.
The non-mining sector drove the increase with capex up 2.3%qtr and 3.6%yr, largely on the back of further spending data centres, fit outs for these centres, electricity generation and upgrades in the manufacturing industry. This saw aggregate capex on buildings and structures (B&S) and machinery and equipment (M&E) both lift 1.1%qtr in September.
Mining investment declined 1.9%qtr and 5.2%yr. As we noted in today’s research piece (see here), mining investment has barely covered what is required to replace the wear and tear on capital equipment. This stall in investment reflects several things including lower expected demand for some commodities as the world transitions to net zero emissions, and uncertainty related to energy policies.
Today’s outcomes further demonstrates that the industries at the forefront of the underlying structural changes impacting the economy continue to invest and build their capital stocks. Electricity generation (13.5%yr), information and telecommunications (29.9%yr), professional services (22.5%yr), construction (24.8%) all continue to invest.
On the other hand, industries at the coalface of the consumer-led slow down are now clearly pulling back on their investment plans, including wholesale trade (-22.5%yr), accommodation and food services (-8.5%yr), retail trade (-5.8%), and arts and recreation (-1.0%yr).
In the near term, these drivers will be somewhat offsetting with capex remaining at an elevated level, but growth continuing to moderate. This is consistent with the capex intentions for the 2024-25 financial year which show that growth in capex will slow to its lowest rate since 2018-19 in year average terms (outside the pandemic).
As consumer demand picks up, we expect to see a more broad-based pick-up in capex – more likely than not this will be a story for 2026-27 and beyond.
Capex spending plans
Alongside the Q3 capex data, today’s release also provided updated capex spending plans for FY2024-25. Estimate 4, which includes actuals for business investments over the first three months of the financial year, showed that business investment is expected to reach $178.2bn, 4.3% higher than what was planned at the same time for the last financial year.
Historically, capex spending plans showed a significant negative bias, as companies consistently underestimate demand for investment. As we move through the year, companies update their plans by incorporating more information on their real time spending, which usually pushes plans for the year higher. We apply historical realisation ratios to correct for this downward bias.
We observe that over the last eight years Estimate 4 on average was more than 5% lower than the final estimates for each year. In the last two years that bias was 6%. If we use the latter number to correct the spending plan estimate received today, we think that the business capex should reach $189.9bn in 2024-25FY, around 4.2% higher level than last year. It should break down to $53.7bn in mining and $135.9bn in the non-mining sector, which represents increases of around 2% and 5% from last FY actuals.
Investment in the mining sector has been relatively subdued since the end of the mining boom, while other sectors are facing more pressures to expand capacity and transform their operations to meet the demand of rising population and comply with carbon emission targets. Indeed, the ABS notes that construction, electricity generation, and transport and warehousing revised their expected capex significantly higher over the quarter.
Capex spending plans are provided on the nominal basis, and price effects accounted for a significant share of the increases in nominal capex in 2021-2023. But more recently growth in capex prices have eased notably, recording 3%yr increases in Q2 and Q3. Machinery and equipment deflator was only about 0.5%yr in Q3, while equivalent growth in B&S was around 5%yr.
We expect that capex deflator growth will continue easing this financial year. We pencilled in price rises of around 2.8%yr, which should leave real capex growth this financial year at around 1.4%yr. With building and structures accounting for a higher share of investment in mining, we expect price increases will have a bigger effect on nominal capex spending in mining, which is expected to fall by 1.3% in year average terms. The non-mining sector is likely to lead the way with around 2.7%yr growth in price adjusted business investment.
The detail
Looking across asset types, M&E grew 1.1% in Q3, with the lift driven by the non-mining sector (1.4%qtr), with mining capex on M&E down 0.2%qtr in September. In the non-mining sector, the electricity generation, information and telecommunication, finance and insurance, health care and social assistance, and manufacturing industries recorded quarterly increases.
Meanwhile, B&S spending also lifted in the quarter (1.1%qtr). It was a familiar story with non-mining capex on B&S lifting 3.5%qtr, more than offsetting the fall in mining capex on B&S (-2.5%qtr). Higher spending on large scale upgrades in the manufacturing industry, and data centres were the standout in September.
Across the major states, New South Wales was the front-runner (+3.6%qtr) in Q3, closely followed by Victoria (+3.2%qtr). The largest falls were in South Australia (-10.9 per cent) and Tasmania (-20.5%). Queensland (-1.5%qtr) and Western Australia (-1.3%qtr) recorded smaller declines.
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