It's good news for mining, bad news for others. Picture: Supplied
It's good news for mining, bad news for others. Picture: Supplied

‘Tremors of concern’: Graph reveals ‘tough times’ to come

Australia got another glimpse of its economic future on Thursday, and it was not all good.

Will we have to endure more tough conditions, or will earning and spending finally loosen up?

Answering this question is usually hard. Most economic data releases give us little extra information. After all, it usually tells us what happened in the past - how much money we spent, how much prices went up, etc.

But some economic data is different. It reveals the preparations businesses are making for the future. Capital expenditure data is the perfect example. By looking at the spending businesses make on machines and equipment, buildings and structures we get a sense of where they think the economy is going.

The RBA is forecasting business investment to grow by 6.9 per cent per cent in the 12 months to June next year. This reflects their forecast of growth gradually getting back to normal. But capital expenditure data came out late last week and showed that optimism might be misplaced.

Businesses cut their capital expenditure by 0.2 per cent in the most recent three month period (what they call the September quarter, i.e. July, August, September) after adjusting for inflation and seasonality. Commonwealth Bank economist Kristina Clifton called the fall "disappointing".

NICE NEWS FOR ROCKS

A fall of 0.2 per cent is not huge, but in a growing economy we'd like it to rise. And the fall in capital expenditure is part of a pattern. It was the third three-month period in a row where capital expenditure fell, as the next chart shows.

The latest results are part of a trend, and it's bad news for 2020. Picture: Supplied
The latest results are part of a trend, and it's bad news for 2020. Picture: Supplied

That suggests businesses are trimming their plans for future growth.

When you zoom in on the -0.2 per cent figure, the details look even more worrying. The mining industry is growing its capital investment, while the rest of the economy is reducing it.

It's very welcome news if you live in remote WA. It also represents a rising tide that could lift boats in Perth, Darwin and parts of Queensland. But if you live in Australia's other big cities, you might feel a tremor of concern. Capital investment in the category that includes services fell 2.7 per cent in the last three months.

Remember that the mining industry uses mostly capital and little labour to produce output. When it buys more machines, that's mostly just great news for the machines industry. The services industry, meanwhile, uses little capital and lots of labour. A small fall in the amount of capital it invests could reflect a larger impact on jobs.

It's good news for mining, bad news for others. Picture: Supplied
It's good news for mining, bad news for others. Picture: Supplied

Of course, we should note that the survey doesn't cover health and education. Those two industries are big employers and so the capital investment data is not a totally definitive picture of the economy.

Still, the capital investment data seems to support a pattern that was visible in the most recent employment data. You might remember it showed unemployment worsening from 5.2 per cent to 5.3 per cent nationwide in October.

But Western Australia held its ground. South Australia got better. The fall was mostly due to a sharp deterioration in NSW, where unemployment went from 4.5 per cent to 4.8 per cent.

Strength in NSW's economy has been keeping the national figures looking strong. If its largely services-based economy is now slipping too, the national picture looks far worse.

THE SLOW DRIP OF BAD PORTENTS

Consumer confidence last week fell to its lowest level in four years. The RBA has just two more rate cuts left before it must turn to unconventional measures. One of few strong points in the economy is house prices, which at this point are a mixed blessing at best.

Christmas shopping season is under way. How much we spend at the shops and online is a big input to how the economy looks next year. The suggestion we get from the capital expenditure survey is businesses are not betting on 2020 being a very strong year.

Jason Murphy is an economist | @jasemurphy. He is the author of the new book Incentivology.


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