Today’s quarterly GDP figure includes an investment component which contains a seemingly-healthy level of capital expenditure. But KPMG Economics warns that, based on investor expectations, Australia is likely to see a sharp fall in capex next year, to the lowest level in a decade, and this will have a significant adverse effect on GDP in FY17.
KPMG also points out that, despite today’s better than expected headline GDP figure, private sector investment activity actually declined by 2% for the quarter. It was only because public sector and inventory investments were higher that overall investment activity had a neutral influence on economic growth.
Brendan Rynne, KPMG Chief Economist, said: “Investment is a key component of GDP, and in the figures released today, Australia’s level of capex is currently holding up quite well in this financial year. Data issued by the Australian Bureau of Statistics (ABS) last week shows capex being revised up by $3.5bn to just under $124bn in FY16.”
But Rynne warned: “People should not assume today’s figure will last long. The same ABS data shows the situation will change dramatically next year, with capex slipping to levels last seen pre-GFC. FY17’s expected much lower capex figure is a huge concern for Australia’s economy, as it will filter through to reduced investment activity levels and hence lower GDP.”
“The ABS is estimating that capex will drop to about $82.5bn for FY17, a decline of more than 33% over this year’s expected results. This will be about the same spend that occurred in FY07, just before the GFC.”
He added: “While about half of the $40bn decline in capex is due to come from the mining sector as the investment binge from that industry winds down, the real problem is the broad number of other sectors also predicting sizable reductions in their capital expenditure.”
Digital disruption is now impacting various industries’ investment plans, with the printing sector forecasting a near 70% decline in capex from $250m in FY16 to just $68m in FY17. Aligned with the capex pull back in the mining industry is an expected reduction in investment expenditure in the fabricated metal manufacturing and construction sectors, both down about 50% on FY16 levels.
The only ray of sunshine in the outlook is coming from the petroleum and coal product manufacturing sectors, which is forecasting about 20% higher capex to just over $350m in FY17. The planned $150m ‘turnaround’ refurbishments of Viva Energy’s Geelong plant is a good example of how positive investment is occurring in this sector.
Brendan Rynne said: “There is at least some comfort in the fact that the respondents to the ABS survey consistently under-estimate how much they are going to spend in the next financial year by about 16%” (which is represented by the difference in the whole line and dotted line in the above graph). But even with this under-estimation, the impact on Australia’s GDP will be significant from this slowdown in investment activity.”
He added: “Modelling completed by KPMG Economics show that reduced investment activity, as a component of GDP, would be pulling down economic growth by at least 1.5 percentage points in FY17. While consumption and exports are likely to help take up some of this shortfall, it is likely that we need public sector investment activity to step up – as we have seen in the December 2015 quarter - to help counterbalance the decline in private sector expenditure.”
Senior Communications Manager, KPMG Australia
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