Record services sector and NSW investmentBusiness investment; Building approvals
Investment falls in the June quarter: New business investment (spending on buildings and equipment) fell by 2.5 per cent in the June quarter to be up 0.4 per cent over the year.
Investment lifts in FY17/18: In 2017/18 business investment rose by 3.1 per cent to $117.99 billion. Nonmining investment rose by 8.8 per cent to a record $82.8 billion – the fastest annual growth rate in 6½ years.
Non-mining: Services sector investment hit a record high of $73.3 billion for the year to June.
Record NSW business investment: NSW business investment rose to a record high $7.958 billion in the June quarter and is up by 11.3 per cent over the year.
Expected business investment: The third estimate of investment in 2018/19 is $101.997 billion and is 1.1 per cent lower than the third estimate for 2017/18. The 16.1 per cent lift in expectations for 2018/19 is the second biggest increase for a June quarter in seven years – above the decade average of 12.4 per cent.
Building approvals: Council approvals to build new homes fell by 5.2 per cent in July to be down 5.6 per cent on the year.
What does it all mean?
Aussie business investment unexpectedly fell in the June quarter, dragged lower by the miners who continued to reduce their spending amid ongoing balance sheet discipline. Also, spending on major LNG projects has declined.
But it wasn’t all bad news. Non-mining business investment posted the strongest annual growth rate in 6½ years last financial year and services sector investment hit a fresh record high during the June quarter. And business spending in New South Wales reached a record high $8 billion, reflecting ongoing strength in economic activity.
Importantly, forward looking estimates of business investment point to a rebound in business spending. In particular, companies forecast investment of $102 billion in the year to June 2019, a 16.1 per cent increase on the estimate three months ago and the second biggest increase for a June quarter in seven years.
Overall, Aussie businesses are in good shape. Conditions are just below decade high levels, profits are robust and the lower Aussie dollar is an added support for those generating earnings overseas. The non-mining sector is investing and businesses are expected to spend even more over the coming year. Jobs are being created and wages are finally lifting for some workers.
It is important to remember that the Bureau of Statistics survey of investment excludes a number of key sectors such as healthcare, education, the public sector and agriculture. So business spending and expectations for future investment are likely to be stronger than reported today.
The Aussie housing market continues to rebalance. Demand from investors is declining due to tighter bank lending standards, lifting borrowing costs and falling home prices. Residential home building across the country, however, remains firm, but approvals are expected to soften as supply builds, particularly for apartments.
What do the figures show?Private business investment
Overall: New business investment (spending on buildings and equipment) fell by 2.5 per cent in the June quarter to be up 0.4 per cent over the year.
Spending on buildings fell by 3.9 per cent in the quarter and spending on equipment fell by 0.9 per cent. Investment was up 0.4 per cent over the year with buildings down by 4.7 per cent, but equipment was up by 6.9 per cent.
Sectors: Mining investment fell by 7.2 per cent in the June quarter, but manufacturing spending rose by 2.7 per cent, while spending by “other selected industries” fell by 1 per cent.
States: In seasonally adjusted terms investment fell in five of the eight states and territories in the June quarter: NSW (up 2 per cent); Victoria (down 5.4 per cent); Queensland (up 3.7 per cent); South Australia (up 29.7 per cent); Western Australia (down 7.5 per cent); Tasmania (down 7 per cent); Northern Territory (down 18.6 per cent); ACT (down 25 per cent).
Prices: The overall deflator for investment goods rose by 1.1 per cent in the June quarter – the biggest lift in 4½ years – after a 0.3 per cent rise in the March quarter. The cost of buildings and structures rose by 1.3 per cent – the strongest growth rate in 7½ years – while the cost of equipment rose by 1 per cent – the largest increase in 2½ years.
Over the year, the cost of investment goods rose by 1.6 per cent – a 4-year high. The cost of buildings rose by 2.4 per cent. And the cost of investment equipment rose by 0.9 per cent – the strongest annual growth rate in over two years.
Forecasts: The third estimate of investment in 2018/19 is $101.997 billion and is 1.1 per cent lower than the third estimate for 2017/18. The seventh estimate of investment in 2017/18 is $118.927 billion and is 4 per cent higher than the seventh estimate for 2016/17.
Council approvals to build new homes fell by 5.2 per cent in July to be down 5.6 per cent over the year.
House approvals fell by 2.8 per cent in July. Apartment approvals fell by 7.8 per cent after rising by 10.4 per cent in June.
In trend terms, overall approvals fell by 1.3 per cent. House approvals fell by 1.1 per cent and apartment approvals were down by 1.8 per cent.
Over the past year 230,021 new homes were approved down from the record high of 242,779 in the year to August 2016.
Dwelling approvals across states/territories in July: NSW (down 5.2 per cent); Victoria (down 4.6 per cent); Queensland (down 6 per cent); South Australia (down 26.5 per cent); Western Australia (down 14.7 per cent); Tasmania (up 13.6 per cent). Trend terms: Northern Territory (up 4.5 per cent); ACT (up 12.2 per cent).
The value of all commercial and residential building approvals rose by 7.1 per cent in July to be up 1 per cent on the year. Residential approvals fell by 4.9 per cent; new building was down 6.2 per cent; but alterations & additions rose by 6.3 per cent. Commercial building rose by 31.5 per cent in July.
Over the year, building approvals eased further from the record high of $128.1 billion in March to $126.5 billion in July. Annual commercial building approvals stood at $46.5 billion in July, down from a record high $49.2 billion in February.
What is the importance of the economic data?
“Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.
The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
What are the implications for interest rates and investors?
Today’s business investment data was mixed, but the devil was in the detail. Mining spending fell in the June quarter, continuing to decline as major LNG projects are completed. But the drag on overall investment is expected to recede with major miners BHP Billiton and Rio Tinto posting their best profits in four years, as communicated during the August reporting season. A pipeline of new iron ore projects in the Pilbara, such as BHP’s South Flank development, are expected to lift spending as construction commences.
And the recovery in non-mining business investment appears set to continue. Investment is particularly strong in the services sector and company forecasts for spending over the next year is particularly encouraging. The data on private business investment complements solid government spending on infrastructure and commercial construction activity.
Rising costs for building and equipment materials are something to look out for in future surveys, as was also recently evidenced in the monthly NAB business survey.
While building approvals data is notoriously volatile on a month-tomonth basis, the outlook for residential dwelling investment continues to weaken. However, we continue to expect a soft landing as the housing market rebalances.
CommSec expects official interest rates to remain on hold until late 2019.
Published by Ryan Felsman, Senior Economist, CommSec
Record services sector and NSW investmentBusiness investment; Building approvals