Australian Business Investment Tanks as Recession Looms

Australian business investment plunged during the third quarter, new ABS figures show. In the three months to September, capital expenditure fell a staggering 9.2%. It came as a huge shock to most economists. Many were expecting a decline of just 2.9%. Which makes the figures released today look like a horror show.

In fairness, economists did get the two digits correct. They just put them in the wrong order. Quite how they managed to miscalculate so badly is a mystery. But it goes to show you can’t believe so-called experts on anything these days.

According to the ABS, total investment amounted to just $31.4 billion in Q3. As a way of comparison, business spending is down by 20% from this time last year. We’re now into our fourth quarter of consecutive capex declines. To say things look bad would be a grave understatement.

The biggest drops came from the usual suspects. Not surprisingly, falls in mining investment led the way. Spending across the sector tanked 10.4% during Q3. This was slightly better than the 11.7% drop in Q2, but abysmal nonetheless.

It appears there’s no light at the end of the tunnel for mining investment. The slight improvement over Q2 could suggest the worst is over. But that’s the only positive aspect to glean from this.

Elsewhere, spending on buildings and structures fell 9.8%. Equipment, plant and machinery investment was down 8.2%. The only upside from these dire figures is that non-mining investment is recovering somewhat.

On top of which, total spending for 2015–16 is projected at $120 billion. That’s up from a $115 billion forecast three months ago. That’s where the good news starts and ends though.

Business investment figures point to slack GDP growth

More than anything, these figures should serve as a wakeup call.

Plunging capex is a sign that next week’s GDP figures will be worse than economists expected. Early estimates had suggested growth of 0.8% in Q3. But if economists are as prophetic as they were with the capex figures, it could make for grim reading.

A lot was expected from third quarter growth figures. After GDP slowed to 0.3% in Q2, many economists tipped Q3 for a rebound. Yet with capex coming off so badly, hitting 0.8% looking unlikely.

RBC Capital Markets’ Su-Lin Ong agrees the target might be a step too far. Here’s what she said in the wake of the capex figures:

You are likely to see some downwards revisions to GDP. Weakness is across the board, in services and capex. Total planned spending looks largely unchanged since the last time. So these are still pretty soft numbers all around.’

The best thing to hope for at this point is that GDP hits 0.3%. That would at least prevent the economy from entering a technical recession.

RBA resists moving on interest rates

The capex figures will put pressure on the Reserve Bank to cut interest rates again. How much pressure will depend on how bad the GDP figures look.

RBA governor Glenn Stevens went on record this week telling economists to ‘chill out’ on prospects for interest rate cuts. It was an unfortunate bit of timing. If GDP is as bad as capex figures suggests it might be, the pressure will mount on the RBA to act.

Markets don’t seem to think a rate cut is imminent. That might explain why the Aussie dollar didn’t move following the capex news. The dollar fell slightly, but remained in the US$0.72 range. If nothing else, it suggests currency traders dismiss the likelihood of a rate cut next week.

But just like the economists who botched the capex forecasts, we’ll have to wait and see. Markets could turn very quickly if GDP figures disappoint…which seems a given.

After all, the RBA’s hesitancy to cut is largely based on the idea that capex is improving. But that doesn’t appear to be the case. The one saving grace is that the ABS capex report is missing a few sectors. For one, it doesn’t account for agriculture spending. And it doesn’t cover health and education spending either. These sectors all benefit from a weaker dollar and cheaper borrowing costs. And they’ll likely improve total spending somewhat. But we can’t assume anything at this point.

Of the non-mining sectors included in the report, capex fell 8.2%. That doesn’t bode well for non-mining investment on the whole.

Either way, non-mining still can’t make up for the decline in mining investment. Unless this changes, business investment will continue to lag.

A recession in 2015?

Crucially, the spending figures point to a looming recession. I’m reminded of what one JP Morgan economist said following the abysmal Q2 capex figures:

Unfortunately I remember the last recession back in the early 1990s. [These Q2 capex] numbers are worse than that. So there’s really something pretty fundamental going on here. The mining side of it is not a big surprise. Once you get to the highest level of mining investment we’ve ever seen, you’re going to have a big fall, so let’s put that aside.

‘The real worry is what’s going on in the rest of the capital spending spree.

We haven’t seen business investment sink this low since our last recession in 1992. The bar was set so low in Q2 that we’ll likely avoid a technical recession this year. Yet there’s really no way of being sure until next week. If economists could misjudge capex figures by 6.3%, Q3 GDP could easily fall below 0.3%.

However you look at it, Australia is set for a challenging finish to 2015. With few improvements in investments forthcoming, we’re staring down the barrel of a recession.

None of this will come as a surprise to Markets and Money’s Greg Canavan. As one of Australia’s leading investment analysts, Greg’s warned all year that we’re sleepwalking into a recession.

His free report, ‘Australian Recession 2015: Unavoidable’, is timely. What looked unlikely for much of the year has become an increasing probability.

Falling mining revenues, business spending, and trade deficits already take their toll on the economy. Government revenues are down, and household debt is up. It’s a grim outlook, and one that’s likely to end in recession sooner rather than later.

But there is a silver lining in all this. You can take actions right now to protect yourself from the fallout of the recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

Mat Spasic,

Contributor, Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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