‘Disastrous’ figures point to recession

AUSTRALIA is in dangerous economic territory, with ‘awful’ March quarter figures suggesting urgent repair is needed to avoid a recession.

THE chances of another interest rate cut have been given a boost, with new data showing business investment slumped in the first three months of the year.

Business investment fell by 4.4 per cent in the March quarter, worse than economists’ forecasts of a 2.4 per cent fall, official figures released on Thursday showed.

The Australian Bureau of Statistics figures, which cover investment in capital goods like buildings and equipment, also showed a decline in the outlook for future investment.

Commonwealth Bank of Australia economist Diana Mousina described the result as “pretty disappointing”, especially for mining investment.

“On the mining side it’s indicating a much larger drop off, that’s a little bit weaker than what the RBA is thinking at the moment,” Ms Mousina said.

“There’s definitely the risk that we might see another rate cut if we don’t see enough of a pick up in other parts of the economy.” The RBA cut rates to a historic low of two per cent at its May meeting, citing factors including weak business investment and slowing Chinese growth.

Market expectations are for the cash rate to be kept on hold when the RBA next meets on Tuesday.

According to the latest capital expenditure data, businesses expect to spend $149.946 billion on capital goods by the end of the 2014/15 financial year, 8.1 per cent lower than the same estimate made for last year.

During 2015/16, firms expect to invest $104.033 billion, a 24.6 per cent drop from the corresponding estimate made for 2014/15. NAB senior economist David de Garis said the investment outlook was quite soft, despite a small upgrade in non mining related businesses.

“It’s probably what the Reserve Bank expected to see when they cut interest rates twice this year,” he said.

Mr de Garis was confident the economy would start recovering later in 2015, helped by industries not covered in Thursday’s release, like housing and retailing.

“Other indicators have been more encouraging than today’s release,” he said.

“We’ve seen retail sales have been a bit better, we’ve seen the labour market show some sense of stability and the NAB business survey is also showing some signs of improvement.” Mr de Garis didn’t think the capital expenditure figures would change the RBA’s interest rate outlook, expecting it to wait to see how much the February and May cuts help the economy before moving again.

ANALYSIS

Anyone looking for signs of the economy’s rebalancing in the latest survey of business investment plans is going to end up with eye strain and not much else.

The survey, second in a series of quarterly surveys covering the 2015/16 year, used data collected in April and early May.

It showed planned capital expenditure by private sector business — or capex, as economists call it — for 2015/16 had risen to $104.0 billion from $102.6 billion three months earlier.

And that’s a problem, for three reasons.

One is that the increase was only a smidgen over one per cent. Over the past 20 years, the projections rose an average of just under eight per cent between the first and second surveys relating to each financial year.

Businesses are less enthusiastic than normal about upgrading their investment plans.

The second reason is that the latest estimate for 2015/16 is a whopping 25 per cent lower than the corresponding estimate for 2014/15, taken from the April/May survey of 2014.

Allowing for the usual gap between plans and final outcomes, capex looks set to fall by somewhere between $24 billion and $35 billion in 2015/16, from about $148 billion in 2014/15.

And with businesses unusually reluctant to add to their plans, the fall looks likely to be at the steeper end of that range. The third reason is that, even taking out the mining sector where capex is set to fall $15-25 billion (25-25 per cent), the non-mining sector — the great hope for the economy’s rebalancing — is not looking good either.

Between the first and second surveys for 2015/16, investment plans were revised up by six per cent, compared with a long-run average of about eight per cent.

There’s no sign the non-mining sector is particularly keen to snatch the seize the baton from the miners.

Making the adjustment for the historical gap between projections and final outcomes, it seems the non-mining sector will generate capex at a nine-year low of $62 billion or so in 2015/16, down by $9 billion or 13 per cent from $72 billion in 2014/15.

A week and half ago, Reserve Bank deputy governor Philip Lowe made a speech about the economy’s transition.

“The part of the transition that is taking place more slowly than we had earlier expected is the lift in business investment outside the resources sector,” he said.

And he sure was right about that.