There was a welcome boost for the economy on Thursday as new data released by the Australia Bureau of Statistics showed a better-than-expected jump in business investment for the December quarter of 2018.
Investment increased 2% to A$30.09 billion during the final three months of the year, which is the biggest rise for three years and well ahead of the 0.5% jump that was forecast. The latest strong surge does not appear to be an anomaly either, as enterprises are planning to spend even more during the next twelve months.
While healthy spending and investment are promising for the economy as a whole, analysts have warned that it may not have a positive impact on fourth quarter GDP forecasts, especially as there was weakness in equipment expenditure.
JP Morgan economist Tom Kennedy said their Q4 projection remains locked in at 0.6% and said there may even be a ‘downside risk’ to that long-standing estimate due to the composition of expenditure. That sentiment was echoed by Nab’s Kaixin Owyong, who also said the GDP could be less favorable when official data is announced next week.
Analysts have been keeping a close eye on the spending outlook though and the latest figures indicate a strong level of enthusiasm among enterprises about growth and expansion for the year ahead. The figures show a 0.7% hike for investment on equipment, plant and machinery, which could help to offset the aforementioned downside risks.
Looking ahead to 2019/20, the latest estimate for overall investment is an impressive A$118.4 billion. The figure had already climbed 11% on the back of enthusiasm in the mining sector, but it has now jumped another 4% with analysts now expecting to top out at A$119 billion.
‘The RBA is likely to be relieved with the upgrade to investment plans,’ ANZ economists noted on Thursday. ‘It is particularly important given the barrage of negative news over recent months, and suggests that despite the increase in downside risks for the economy, businesses remain relatively upbeat about the future.’
Business investment had been on a downward spiral following the end of the mining boom but 2017 marked a turnaround as public investment surged to support the country’s ever-growing population. The latest upswing is also likely to provide a timely boost to economic optimism at a time of global uncertainty.
BIS Oxford Economics’ Sarah Hunter believes the Reserve Bank of Australia‘s 5% growth target for business investment is now closer to being achieved for the current financial year. There are also signs that mining could be rebounding after a prolonged slump as NAB noted that there were ‘increased job ads and greater activity on mining flights’, despite an overall decline in spend.
Westpac senior economist Andrew Hanlan is also bullish on mining investment as he expects it to tick higher in the 2020 financial year due to an increase in equipment maintenance spend and the onset of new iron ore projects. Major organizations in the sector are also forecasting greater expenditure.
Woolworths recently said its larger capital expenditure was driven by a need to overhaul supply chains, install new IT systems and support its stores. Matt Bekier, The Star Entertainment Group chief executive, added this week: ‘We are not changing our strategy, or cutting back on the sales teams, or cutting back on capex plans.’
The robust outlook for investment is a positive sign for the economy, though the prospect of subdued consumer spending in the short to medium-term, and a cooling property market, will continue to apply pressure amid other external headwinds.