The Australian Bureau of Statistics (ABS) published the September-quarter – Private New Capital Expenditure and Expected Expenditure, Australia – data today as part of the sequence of data releases relating to next Wednesday’s release of the third quarter National Accounts. Today’s release is especially important given the earlier signs that expected investment would plummet in 2016 and drive economic growth towards recession. Today’s release confirms the worst with Total new capital expenditure falling by 20 per cent in the 12 months to September 2015, investment in Building and structures falling by 23.6 per cent over the same period, and investment in Equipment, plant and machinery falling by 12.7 per cent. In the September-quarter alone, Total new capital expenditure fell by 9.2 per cent. Expected investment for 2015-16 is now 20.9 per cent lower than the equivalent figure 12 months. This is a disaster for the Australian government’s fiscal strategy outlined earlier in May, which was planning to accelerate the austerity. The fiscal stands is currently based on deeply flawed forecasts of private spending and if the investment plans signalled in this data release are realised then the economy will continue to move towards recession over the next 12 months. In light of the latest investment expectations revealed in today’s ABS data release, the Government should abandon their fiscal strategy immediately and announce a significant stimulus package. Unemployment is already at elevated levels and will rise further under the current trends. This is another case of neo-liberal austerity white-anting the capacity of the economy to deliver prosperity for all.
In the Federal Fiscal Statement (aka ‘The Budget’) which the Treasurer introduced to Parliament earlier in May, the Government was basing its austerity package on assumptions that Non-Mining Investment would grow by 2 per cent in 2014-15, 4 per cent in 2015-16, 7.5 per cent in 2016-17.
The – Statement 2: Economic Outlook asserted that:
Real GDP is expected to grow by 2¾ per cent in 2015‑16. This is one quarter of a percentage point slower than expected 12 months ago in the 2014‑15 Budget, as a sustained recovery in non‑mining business investment is taking longer than expected. However, stronger non‑mining business investment is expected to drive an increase in growth to 3¼ per cent in 2016‑17.
So all the fiscal estimates (size of deficit, outstanding public debt etc) and the economic outcomes forecast (Real GDP growth, unemployment etc) are based, in part, on the recovery in non-mining business investment as indicated.
Commentators (including myself) were skeptical as soon as the Government released the forecasts. There was no way that the economy was going to achieve the sort of performance that the Government was claiming and the only question was whether the fiscal austerity that was being signalled would drive the economy into recession.
The June-quarter National Accounts data, which I analysed in this blog – Australia national accounts – heading for recession at this rate – told us the growth in the year to June 2015 had fallen to 2 per cent and that Real net national disposable income fell by a further 0.9 per cent over the quarter and 1.1 per cent over the year.
On an annualised basis, growth was heading to around 0.8 per cent per annum if the June-quarter trend continued, which would blow the Government’s estimates out of the water.
Today’s results confirm that the September-quarter GDP figures are likely to be worse than last quarter’s results.
The reality is starting to look like recession if the Government does not rather radically alter its fiscal settings (from austerity to stimulus).
The following graph, not part of today’s ABS release, shows the – RBA Commodity Prices Index – which is a monthly index (2013/14 = 100) compiled by the central bank to track the prices our export sector experiences.
The graph shows Base Metals (blue line) and All Commodities (red line) for the period from July 1982 to October 2015. It tells you a lot about recent economic history in Australia, and experience that other commodity exporting nations such as Canada can also relate to.
Commodity prices, especially for base metals accelerated in 2004 as Chinese economic growth stepped up several notches. The GFC saw an end to the peak, but once China resumed its higher growth rates as it re-balanced away from exports there was a small recovery which ended in early 2011.
While commodity prices are still well above the historical averages prior to the boom, the fall since the peak in 2007 has significantly cut mining incomes in Australia.
As a consequence, mining investment has virtually come to a halt.
The ABS Private Investment data suggests that the 2015-16 fiscal estimates will not be even remotely achieved, given the expected spending plans signalled by private firms.
The ABS data shows that for the September-quarter 2015 (real and seasonally-adjusted):
- Total new capital expenditure fell 9.2 per cent for the quarter and a staggering 20 per cent on the year to September 2015.
- Investment in Buildings and structures fell 9.8 per cent for the quarter and 23.6 per cent on the year to September 2015.
- Investment in Equipment, plant and machinery fell 8.2 per cent for the quarter and 12.7 per cent on the year to September 2015.
- Mining investment fell 10.4 per cent for the quarter and a staggering 29.6 per cent on the year to September 2015.
- Manufacturing investment rose by 6.9 per cent for the quarter and 1.6 per cent on the year to September 2015.
- Non-Mining investment fell by 8.2 per cent for the quarter and 9.1 per cent on the year to September 2015.
Here are two graphs produced from Table 3B, the first showing real private capital expenditure by broad sector from the September-quarter 1987 to the September-quarter 2015.
The boom and bust in the Mining sector is quite extraordinary in historical terms.
The second graph shows the quarterly percentage change in Total and Mining private capital expenditure in real terms from the December-quarter 2007 to the September-quarter 2015.
Capital formation has declined in seven of the last eight quarters and the rate of decline is increasing. There is clearly little confidence as consumers remain tight and the government’s attempt to impose austerity hacks into spending (and sentiment).
But the real news from the data is the forward-looking expenditure plans signalled by the firms:
- Total expected expenditure on capital formation for 2015-16 is now 20.9 per cent lower than the firms indicated for 2014-15.
- Total expected expenditure on Buildings and structures for 2015-16 is now 27.2 per cent lower than the firms indicated for 2014-15.
- Total expected expenditure on Equipment, plant and machinery for 2015-16 is now 6.3 per cent lower than the firms indicated for 2014-15.
The ABS also produce very interesting data on the expected investment expenditure plans over 7 discrete quarters. The ABS conducts a survey “in the 8 or 9 week period after the end of the quarter to which the survey data relate”. They ask firms to “provide 3 basic figures”:
– Actual expenditure incurred during the reference period (Act)
– A short term expectation (E1)
– A longer term expectation (E2).
As a result the following pattern of data collected emerges:
In relation to this pattern, the ABS say that for 2015-16:
– the first estimate was available from the December 2014 survey as a longer term expectation (E2)
– the second estimate was available from the March 2015 survey (again as a longer term expectation)
– the third estimate was available from the June 2015 survey as the sum of two expectations (E1 + E2)
– in the September 2015, December 2015 and March 2016 surveys the fourth, fifth and sixth estimates, respectively, are derived from the sum of actual expenditure (for that part of the year completed) and expected expenditure (for the remainder of the year) as recorded in the current quarter’s survey
– the final (or seventh) estimate from the June quarter 2016 survey is derived from the sum of the actual expenditure for each of the four quarters in the 2015–16 financial year.
As a result we get the following graph of Total Capital Expenditure (black columns) and Expected (clear columns), which allows you to trace the shifting expectations of expenditure (the plans) and what actually transpires.
It is clear that expected (planned) private investment expenditure for 2015-16 is significantly lower than it was in 2014-15.
The dramatic drop in expected investment spending in 2015-16 signaled by Estimates 1 and 2 has been revised upward slightly, but still way down on actual and planned expenditure in 2014-2015.
If these plans are close to reality then the forecasts in the Fiscal Statement will be very wrong indeed as will the final real GDP growth estimates.
If these plans are realised and the government doesn’t relax its fiscal stance then Australia will head into recession some time over the next 12 months.
Next Wednesday, the Australian National Accounts come out and we will see by how much this appalling investment performance drags down growth.
Last quarter’s growth was a snail-like 0.2 per cent. The decline in investment has accelerated in the third-quarter 2015, which suggests that the September-quarter growth overall will probably be below the June-quarter result.
Australia is demonstrating how an affluent country can undermine the well-being of its citizens through poorly conceived macroeconomic policy.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.