Financial Growth

The results of the December quarter survey were encouraging, with firms upgrading their investment plans for the current fiscal year, even though the miners continue to scale back. Moreover, for the first time in six years, firms’ initial spending estimates for 2018-19 are higher than those for the preceding year. This probably is a result of the general improvement in underlying business conditions, particularly profitability.

That said, actual investment in the December quarter disappointed, with spending falling short of expectations. Last quarter, investment dipped 0.2%q/q - economists had expected a 1% rise. This is the first drop in total investment spending in a year, though, and follows a near-2% rise in Q3. Investment in mining again was the culprit, diving more than 5%, while spending by the manufacturers and firms in other sectors of the economy increased. Spending across all sectors is up 4% over the year.

The expectations component of the survey was more encouraging. Indeed, the fifth estimate of firms’ spending for the current fiscal year was revised up by nearly 5%, implying that investment in the year ended June 2018 will be 2% higher than the previous fiscal year, after adjustment for average estimation errors. That’s good news, particularly as the expected rise comes after falls in the previous four years. These falls were led by firms in resources, albeit from a record- high base, though, thanks to the sustained mining investment boom.

The first estimate of spending for 2018-19 came in only slightly short of economists’ expectations, which had implied a small rise in spending next year. The initial estimate of spending can be unreliable, and usually is revised higher in subsequent estimates, so perhaps we should not be too worried that there was not a more material upswing. But, the business environment continues to improve, with profits higher, the maintenance of low interest rates, and record hiring last year – employment and investment typically move together.

The likelihood of more delays in the planned lowering of the corporate tax rate in Australia does not seem to have played a significant role here, nor growing fears that interest rates probably have to rise. Indeed, firms can run ageing plant and equipment only for so long, so a wave of new investment on the replacement and upgrading of equipment should have been on its way. Moreover, public spending on infrastructure is enjoying a sustained upswing, particularly in the larger capital cities.

Mining and non-mining investment