30 November 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
Australia real business investment
Sources: Australian Bureau of Statistics 5625. Real Private Capital Expenditure is nominal business investment adjusted for price movements
Australia’s capital expenditure (capex) has had a tough run over recent years. The mining sector’s real capital spending on equipment and plant (blue line) has been falling for the past six years. However there are signs that this downturn is coming to an end. As the level of mining capex is now back to the 2007 levels that preceded the mining boom, the downside risk from here seems limited. Mining companies are likely to keep their spending around current levels to keep existing production running.
The outlook for the non-mining sector (red line) is more debatable. The non-mining category includes sectors such as the education, health, retail and manufacturing industries. Australia’s low interest rates, a surge in government infrastructure spending, as well as encouraging business surveys suggest that non-mining should be growing strongly. However non-mining spending has risen by a modest 3.8% in the past year to September 2018.
This suggests that the Australian corporate sector is generally cautious about long-term commitments. This could reflect a multitude of reasons such as doubts whether potential projects can meet their targeted returns, the preference for conservative debt commitments, or even the perception of political risks with the coming 2019 Federal Election.
So what’s next for non-mining capex in 2019 is anyone’s guess given this contentious balancing act between expected rewards and risks.
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