JP Morgan: Today's 4Q business investment survey

Aussie firms plan to spend more on capex in 09/10. RBA decision a close call.

Today’s 4Q business investment survey was much firmer than we had anticipated. It revealed that firms scaled back their investment plans for the current fiscal year, but not as much as we had expected. In the previous survey, firms planned to raise spending 26% in the year ended June 2009; now, the plan is for spending to rise 16.6 % (J.P.Morgan 14%). Moreover, firms plan to spend even more on capex in the 2009-10 year - we expected a sharp fall.

Similarly, in constant price terms, spending unexpectedly increased 6.0%q/q in the fourth quarter, bucking expectations for a decline (J.P.Morgan -7%, consensus -3%). This followed a 1.6%q/q rise in 3Q, revised up from 0.6%. The biggest rise was in firms’ spending on buildings and structures, which bounced 11.5%q/q, marking the fifth straight monthly increase. Spending on plant and equipment rose 1.0%q/q, after declining in the previous three months. Mining and manufacturing investment grew 4.9%q/q and 4.8%, respectively, in 4Q, and was up in all other ‘selected’ sectors (+7.0%).

The more important first print of firms’ expenditure plans for the 2009-10 year was A$79.9 billion, substantially more than our anticipated A$57 billion. After adjustment for firms’ usual under-estimation of actual spending (using a five-year average realisation ratio), this implies a 10.7% rise in spending in the forthcoming fiscal year, relative to expected spending in the year ended June 2009. The deterioration in the global economic outlook, particularly in Australia’s major trading partners, doesn’t seem to have affected firms’ spending plans, at least not yet.

That said, given rapidly accumulating evidence that proposed investment in mining and associated infrastructure is being postponed or cancelled, and a string of announcements of mine closures and job losses in recent months, we expect business investment plans to be scaled back dramatically in coming quarters. Investment’s falling share of the economy will leave a serious dent in the employment outlook; this underpins our view that the jobless rate will rise sharply in the next two years to 9% by the end of 2010, compared to 4.8% currently.

With respect to the monetary policy outlook, since the last Board meeting in early February the news from offshore has been almost uniformly bad, particularly for Australia’s major trading partners in Asia. We, therefore, still believe the RBA will cut the cash rate 50bp next week, although the decision has become a much closer call, partly owing to today’s better than expected capex numbers. RBA officials have indicated that the main source of their anxiety is deteriorating global economic and financial conditions which, in our view, eventually will feed into weaker investment, exports, and job growth.

On the other hand, recent RBA verbiage has hinted that the end of the easing cycle is close, and officials may choose to pause next week to allow time to assess the impact of the substantial monetary and fiscal loosening already delivered. One problem for officials is that there is no obvious trigger for a pause - perhaps the capex survey is it, although, like us, we suspect RBA officials will be suspicious about today’s upbeat result.

Finally, we have amended our 4Q GDP forecast following today’s better than expected capital spending numbers. Previously, we had expected GDP to shrink -0.5%q/q in 4Q, which included a sharp contraction in investment in new machinery and equipment. Now, though, in the wake of today’s data, we expect flat GDP growth in 4Q. This remains, however, a preliminary estimate - we will finalize the forecast next week following the release of current account, government spending, and inventories data.

ENDS

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