The Economy: Capex Boom Still Growing

Do you want the bad news, or the good news about the latest private investment figures?

Well, the good news is that the boom is alive and will be bigger than forecast in 2011-12.

The bad news is that's going to worry the Reserve Bank and will increase the prospects for more interest rate rises, no matter what is happening in the non-resources sectors of the economy.

The latest investment data issued by the Australian Bureau of Statistics yesterday shows just over $30 billion was invested by companies and others in the 90 days of the March quarter, up 3.4%.

Put another way, it was around $330 million a day, which is a fantastic figure.

Spending on building, structures, plant and equipment rose in the quarter which ended up being much stronger than forecast (2.9% was the market estimate) and was more than double the 1.3% rise in the December quarter.

If other quarterly data is positive for the quarter, the economy could escape with a small fall in GDP.

But the investment figures probably only offset the weaker than expected construction spending that was released this week (see below).

The spending came despite the disruption caused by the floods in Queensland and parts of Victoria at the start of the year.

But the most interesting part of the release was the second estimate for investment in the 2012 financial year: a massive $139.54 billion, against the first estimate of $132.7 billion made three months ago.

That's 30.9% above the second estimate for 2010-11 which again underlines what the Reserve Bank is worried about when it discusses the economy and monetary policy.

That compares to the 6th estimate for the current financial year of $124 billion, a fall of 4% from February's 5th estimate.

And the driver for the big increase next financial year is the boom in mining investment: a massive $83.3 billion and well above the budget estimate, made only a fortnight ago of $76 billion.

Quite clearly the boom will be bigger than expected (and by the way Shell added $11 - $12 billion to spending next year and for the next three years with its decision to go with the Prelude floating LNG project and there's a multi-billion dollar 'yes' coming from Woodside in the next few months for the second stage of its Pluto project.

And the surge is solely in mining and resources: manufacturing expects to spend $11.9 billion in the new year, down from $12.2 billion when the current financial year is totalled.

But the new figure is about line ball with the estimate a year ago, so there's no sign yet of the stronger dollar stopping spending on expansion in this sector.

The big fall was noted in the "other selected industries" category with a 2011-12 estimate of $44.8 billion down on the 2010-11 estimate of $60.6 billion.

The sub-sector most responsible for that fall is electricity, gas, water and waste services. But again, the March quarter estimate is pretty much in line with spending in the last two years.

The AMP's chief economist Dr Shane Oliver highlighted the two faced nature of the investment figures.

"On the one hand it adds confidence to the strong medium term growth outlook for Australia," he wrote yesterday.

"On the other it will only serve to reinforce the Reserve Bank's inclination to raise interest rates again at some point.

"Given heightened global uncertainty at present, mixed recent economic data releases in Australia and the likelihood that next week's GDP data will show the Australian economy as having contracted in the March quarter, we think that a June rate hike is unlikely.

"However, a move around August still looks likely," he said.

The Government's resources forecaster, the Australian Bureau of Agricultural and Resource Economics yesterday said that at the end of April 2011, there were 94 projects at an advanced stage of development, with a record capital expenditure of $173.5 billion.

This represents a 31% increase from October 2010.

New capital expenditure in the mining industry is estimated to be $55.5 billion in 2010-11, 53% higher than in 2009-10.

"In real terms (2010-11 dollars), new capital expenditure in 2010-11 is the highest on record and nearly four times the average annual expenditure of the past 30 years ($14.7 billion), Abares said.

The record value of advanced minerals and energy projects reflects, in part, the decision to proceed with the development of the Gladstone LNG project and BHP Billiton, Fortescue Metals and Rio Tinto's commitment to several coal and iron ore developments over the next three years.

Based on industry intentions from the December quarter 2010, Australian Bureau of Statistics (ABS) survey data indicate capital expenditure in the mining sector in 2011-12 may be around $73.7 billion.(Actually, $76 billion, according to the ABS data issued yesterday).

That's an increase of 30% on the record figure for the current year, or double the amount of just two years ago.

In the six months to April 2011, 10 projects with a combined capital cost of $2.8 billion were completed in Australia.

But the weaker than expected construction data for the March quarter adds to the suggestions that the RBA will delay a rate rise until it gets a bit more of handle on the economy.

Total construction work done in Australia rose 0.7% in the March quarter (to $42.326 billion) in seasonally adjusted volume (price-adjusted) terms, according to the Australian Bureau of Statistics.

The median market forecast was for a 1.5% rise in the quarter.

The make-up of the small rise in construction in the quarter was a 4.6% rise in engineering construction, residential construction was up 1.9%, but non-residential fell 10.2%.

The figures are already expected to show a contraction in economic growth in the March quarter due to the natural disasters over summer.

That has already been alluded to by the Reserve Bank in the Minutes of the May board meeting, released last week.

Within that total, construction by the private sector for the private sector was up 2.5%, while public sector construction was down 3.6% as the various government stimulus packages have wound up.

Within the private sector, residential building was up 3.5%, while non-residential building was down 3% and engineering construction - mines, bridges, and the like - was up 3.6% (that's the mining boom at work).

The public sector contribution was whacked by a 19.2% plunge in building work (residential and non-residential combined).

That was only partly offset by infrastructure activity, with engineering work up 6.4%.

But the bottom line is the construction added very little to economic growth in the quarter, meaning that the chances of growth in the March quarter are now small, if not at all.

The negative effects of the winding back of fiscal stimulus and widespread flooding can be seen in the building figures.

Looking ahead, the ABS compiles estimates of the amount of building work (not including engineering work) still to be completed or started.

The peak was in the March quarter of 2010, with $58.9 billion of work in the pipeline as the various stimulus spending (on schools for example) were in full swing.

That fell to $53.6 billion in the latest quarter, about where it was two and a half years ago.

And the way activity is going in the domestic economy; this figure is going to fall a bit more and won't be making much of a contribution to growth for a few quarters to come.

But that is what the RBA wants to see because a buoyant construction sector, especially in non-residential building and the government sector, is a competitor for labour and resources needed to feed the mining and resources boom.

Next week we get data on the current account, government spending and business indicators which will give us figures on inventories, wages and profits.

And RBA Deputy Governor Ric Battellino had some interesting points in replies to questions at yesterday's brokers' conference in Sydney.

For example, he said the commodity prices boom fuelling Australia's economy is being driven by a strengthening global economy and is likely to continue for some time.

And he dismissed any notion of a commodity price ''bubble", saying ''the word bubble is a very emotive term".

'There is no doubt that the world economy is very strong," he said, answering questions from the floor. ''Last year the economy grew by 5 per cent.

"Every time the world economy grows by 5 per cent, commodity prices rise, and the same thing is happening now."

What was unusual about the current boom was that was being driven by demand from Asia, Mr Battellino said. ''From all the work we've done, most of what we've seen in commodity prices today is driven by fundamental demand/supply factors.

"There's no doubt there's a bit of speculative activity still, but fundamentally it's very strong demand that is driving this."

Mr Battellino could not forecast how long demand would remain strong, but suggested prices had not reached a peak yet.

"Most people have forecast the next year, at least, before prices come down (and) they keep going up," he said. ''It's not clear that they've even peaked yet."

He said the world economy is in an upswing and "'We're at the stage of the cycle where the world economy is still gaining strength. That's been the dominant force of the world".