It seems the market has yet again misunderstood the implications of the ABS private capex survey just released for Q2. This is important as the last time this happened the market totally missed the downside risks to the Aussie dollar and interest rates, which are still very likely to fall.
While some are suggesting the data points to a "plateau" in investment in Australia and the Aussie dollar rose, the survey actually points to falling investment over the next 12 months. This will be a heavy burden on GDP forecasts, although Q1 looks like it will be ok thanks to a big contribution from trade and steady consumption.
Total expectations for spending for the 2014 financial year were 9.8% lower than the same time last year, which is a deterioration from Q1. It is also 5.6% lower than the estimate for the current financial year, which should be pretty close to correct given its almost over.
The mistake a lot of people seem to be making is that they are scaling up the most recent estimate for 2014, as over the past few years actual outcomes tend to be higher than initial estimates. But this is hugely misleading as conditions of the past 5 years are totally different to today.
A clear example of this is to look at the likely realisation ratio (expected capex vs. actual for a given year) for the current financial year vs. the last 5 years. The chart on the left shows that if you were using a 5 year average, you would be scaling current estimates up by 16%. But for this year you should actually be scaling estimates down by 3%.
To me, it seems totally unrealistic to use the last 5 years as a benchmark compared to the last 12 months.
Mining investment continues to look like it has past its peak, with the second estimate for next year still very weak. If anything, future estimates are likely to be lower than this one.
The bright spot is investment ex mining and manufacturing, which is likely to be 5-6% stronger in 2013, suggesting monetary policy is being supportive.
But the point is that this isn't enough to offset declines elsewhere in the next 12 months, with rising employment likely to be corrosive to other parts of the economy.
