Weekly economic briefing: Private capital expenditure – A turning point?

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Private capital expenditure: A turning point?

The recent release of the private capital expenditure survey by the Australian Bureau of Statistics (ABS) has given some of the most promising signs yet that the downside of the mining investment boom is nearly behind us. After peaking in 2012, business investment has fallen in dollar terms for five consecutive years, but 2017 may bring an end to that trend.

The latest survey results show that real private sector capital expenditure (capex) rose by 0.8% in the June quarter, an increase for the second straight quarter. This comes after falls in eight of the previous nine quarters, and a pervasive downward trend since 2012 (see chart 1).

Chart 1: Real capital expenditure, by industry 2004-2017


Source: Australian Bureau of Statistics 5625.0 – Private New Capital Expenditure and Expected Expenditure

 

The result was supported by manufacturing investment, which rose by 1.4% in real terms during the quarter. Capex outside of mining and manufacturing also rose by 2.8% in the quarter. Over the past year this grouping has seen strong investment gains in electricity, gas and water, construction, retail trade, transport and telecommunications.

Mining investment fell for the 12th consecutive quarter, falling 2.8% in the June quarter after falling 1.7% in the previous period. However, this decline in mining investment is less than in previous periods. Over the past year, mining investment has still fallen 15.1%, but it now appears to be bottoming out.

And this comes as the latest ABS release points to a more bullish view of future spending. Compared to three months ago, Australian companies now expect to spend an additional $15.2b (17.6%) in 2017-18, taking total expected capex for 2017-18 to $101.8b. That represents the largest increase in expected future capex since 2010-11.

To support the possible turning point, the June release of Deloitte Access Economics’ Investment Monitor recorded an increase in the number and value of new private sector projects in the June quarter. This was led by BHP Billiton’s $4.2 billion South Flank iron ore development in Pilbara and Lyon Group’s proposed $1 billion Riverland Solar Farm and battery in Roxby Downs.

The improved investment data and outlook will be reason for many at the Reserve Bank to smile, as they have been looking for a broader based investment recovery to commence, rather than one focused on residential housing.

And this improvement is supported by some broader indicators – business confidence is strong, corporate profits have lifted, interest rates remain very low, and global economic growth has surprised on the upside through 2017.

The current improvement in the capex cycle is modest compared to heady upswings of times past. But after five tough years for business investment, it’s a welcome development nonetheless.

 

For more information on the Australian brief, please contact the co-authors, David Rumbens and Harry Murphy Cruise.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Summer summary

  • With the return to work underway here’s our summary of the key developments in the global economy and in politics over the summer.
  • On the economic front the mood has been fairly positive, with activity nudging higher led by the euro area, Japan and emerging markets. Unemployment has fallen in Europe, North America and Japan since June. The VIX index, a gauge of financial market uncertainty, is close to a 25 year low. In the last three months global equity prices have risen by 5% and the euro by 4%. The dollar and the pound have continued to soften. Copper and oil prices rose over the summer, the later buoyed by Hurricane Harvey.
  • The turnaround in the economies of the euro area continued over the summer. German business confidence is running at the highest level since German reunification in 1990. Growth forecasts for the region have shot up in the last year, and the recovery has spread from strong performers, particularly Germany and Spain, to countries which have, until recently, have lagged well behind, including France, Italy, Portugal and Greece. It is a sign of how times have changed that the Greek government was able to raise money from the bond markets in July for the first time in three years. Market expectations of a ‘Grexit’ have dropped to an all-time low.
  • Japan, the world’s third largest economy, showed unexpected signs of strength over the summer. Business confidence is at a 25 year high and the economy has just posted its longest unbroken period of growth in more than a decade. The stronger picture suggests that Prime Minister Shinzo Abe’s economic stimulus programme, so-called Abenomics’, may, finally, be kicking in.
  • US growth has been ok, but not exciting. The fact that the US is expected to growth by around 2.0% this year, the same rate as the usually more sluggish euro area, says it all. Particular areas of strength for the US are job creation and manufacturing output. The Federal Reserve felt sufficiently confident about the recovery to raise interest rates in June. Market watchers see the Fed raising rates again in December and think there is a good chance that the Fed will start to unwind Quantitative Easing before the end of the year.
  • UK activity softened over the summer as consumer spending slowed in the face of higher inflation. Second quarter growth came in at 0.3%, making the UK the slowest growing economy in the Group of Seven major industrialised nations. July’s CFO Survey reported that UK CFOs see Brexit as the biggest risk facing their businesses and are responding by cutting costs. But a stronger global economy and a weak pound are a boon for exporters. The CBI reported that export orders for manufacturers are close to a 20-year high.
  • Global inflation pressures eased over the summer. The effect of last year’s sharp rises in commodity prices are starting to fade and lower unemployment has not, so far, done much to push up wages. Economists have trimmed their forecasts for inflation in the US and the euro area in recent months.  The UK is an outlier – the Brexit-induced fall in the pound has given the UK one of the highest inflation rates in the industrial world and the inflation rate is likely to remain relatively high, and above 2.0%, into 2018.
  • On the political front the risks of a shutdown of the US government have risen. President Trump threatened to close the government if the Congress did not finance the President’s proposed border wall with Mexico. Concerns over US protectionism were stoked by Mr Trump’s threats to withdraw from the North American Free Trade Agreement. A number of senior aides left the White House over the summer, including chief strategist, Steve Bannon, and Anthony Scaramucci, who stepped down as communications director after 11 days. North Korea’s missile and nuclear tests have substantially raised tensions in the region.
  • In Europe worries about a breakthrough by Eurosceptic parties have eased. In France Emmanuel Macron won a convincing victory over the Marine Le Pen’s Front Nationale in May. Mr Macron’s popularity ratings have since dropped sharply, with a sizeable majority of French voters now dissatisfied with him, a worse performance than his last two predecessors at this stage of presidency.
  • The risks of an upheaval remain in German’s election on 24th September look low with Angela Merkel’s CDU/CSU coalition maintaining a strong lead in the polls. The latest betting odds imply a 92% probability of Mrs Merkel being re-elected as Chancellor of Germany.
  • The UK government has published seven Brexit position papers, including ones on Northern Ireland, citizens’ rights and the jurisdiction of the European Court of Justice, over the summer. The UK government sees a need for a transition period after 2019 for Britain to finalise an exit agreement with the EU. Over that period the government appears to want to maintain something akin to membership of the European customs union. In late August the Labour Party shifted its stance by backing membership of the single market at least for four years after the UK formally leaves the EU in 2019.
  • Labour have enjoyed a surge in support since the June elections and are evenly tied with the Conservatives with 42% of the vote in the latest opinion polls. Labour leader Jeremy Corbyn’s satisfaction rating has risen from 31% in the month before the elections to 44% now. Mrs May’s ratings are down from 43% to 34%, her lowest since becoming Prime Minister.
  • The overall balance of economic news over the last three months has been positive. The obvious uncertainties are posed by North Korea, US politics, debt levels in China and Brexit. Equities have had a great run, but we’re seeing more nervousness about the risk of a correction. Purchases of derivative contracts intended to protect investors from a fall in equity prices have risen and the so-called SKEW index, a measure of investor concern about tail risk, rose close to the highest level on record in mid-August.  The global economy has strengthened a bit over the summer, but the prudent  response is caution not euphoria.

PS – The apparent collapse in levels of savings in the UK has stoked worries about the condition of household finances. Last week the UK’s Office of National Statistics revised up previous, historic savings ratio figures in response to shifts in the structure of the economy, particularly higher levels of self-employment which have raised income from dividends. The UK’s so-called ‘savings crisis’ may not be quite as acute as feared.

 

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 1.7% at 7,439.

International economic briefing by Ian Stewart

Economics and business

  • Market’s PMI indictor of global manufacturing output reached a 6 year-high
  • The euro hit the highest level against the dollar since January 2015
  • UK Monetary Policy Committee member, Michael Saunders, called for an interest rate rise to prevent inflation heading back to 3%
  • Growth in UK consumer credit slowed
  • UK house price inflation has more than halved in the past year
  • Amazon cut Whole Food prices by as much as 43% on its first day as the new owner of the upscale grocery chain
  • Storm Harvey has resulted in 20% of US refining capacity being shut down pushing wholesale gasoline prices rose to a 2 year high
  • Canada grew at its fastest pace since 2011 in Q2
  • German consumer confidence rose to a 16 year high in August
  • Italian employment reached its highest level since the financial crisis
  • Theresa May, the UK’s prime minister, said she intends to remain in power “for the long term” and that she will run as Prime Minister in the next UK election
  • North Korea fired a ballistic missile over Japan and detonated a test nuclear weapon
  • The UK national Association of estate agents reported that in July only 3% of UK properties sold above their asking price and 80% sold below their asking price
  • Home ownership amongst 25 to 30 for your olds in the UK has dropped from 60% to 39% in the last 20 years

Brexit and European politics

  • The UK’s prime-minister, Theresa May, met with the Japanese prime minister, Shinzo Abe, in a three-day visit to Japan to provide assurances over Brexit
  • The purpose of the visit was also to obtain a pledge from Mr Abe to “work closely together to strengthen [the] economic partnership”
  • Mario Draghi, president of the ECB, said global growth depended “crucially on openness to trade”
  • The UK and the EU held their third round of Brexit negotiations in Brussels to progress talks on the UK-EU exit issues
  • Jean-Claude Juncker, European Commission president, said the Brexit policy papers produced by the UK government were not “satisfactory” and that the UK needs to be “educated” over the consequences of Brexit
  • Liam Fox, the UK’s international trade secretary warned the EU that Britain could not be “blackmailed” over the so-called “Brexit bill”
  • The Labour party changed their position on the UK’s departure from the EU saying the UK should stay in the single market for a “transitional period” of two to four years after departure
  • David Davis, the UK’s Brexit secretary, said Britain would not take part in a “race to the bottom” to secure new trade deals with countries outside the EU
  • President Emmanuel Macron’s government has begun its drive to overhaul France’s rigid labour laws by making it easier to hire and fire
  • Martin Schulz, Angela Merkel’s rival in the German election, called for an end to Turkish EU accession talks as tensions between Germany and Turkey escalated

And finally…

  • The French president, Mr Macron, came under fire for spending €26,000 on a makeup artist in the three month period since he entered the Elysée Palace – Moolah-rouge

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