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Thursday, 1 December 2016

Q3 wipeout (mining capex obliterated)

Q3 wipeout

Statistically if you print out a long line of numbers, even if the trend is increasing, sooner or later you will get a number that is smaller than the one for the prior period.

Step forward Australian GDP, it looks as though your time has finally come! 

On the back of some other weak numbers, including for construction, today's Private New Capex figures more or less assured that the economy didn't grow in any meaningful way in the third quarter of 2016.

Total capital expenditure fell by -4 per cent to $28 billion to be -13.7 per cent lower than a year ago.

No prizes for guessing that it was the mining industry's woes that accounted for the drop.

Mining capex has dropped by -35 per cent over the past year to be -59 per cent below its 2012 peak.

Unfortunately manufacturing has been going nowhere fast either, with capex meandering moderately lower over the past year (although the PMI gauge has at least now turned positive). 

Capital investment in other industries has been rising - which is great news for the capital cities - but is clearly struggling to pick up the slack! 

Quarterly results have been steadily improving in the two largest states thanks to the standout economies of Sydney and Melbourne. 

In fact, actual capital expenditure in NSW has moved +19 per cent higher than in the September quarter of 2015.

Meanwhile Queensland has now taken its medicine and at last saw capex rising again in Q3. 

Western Australia is still working through its painful adjustment, however, with capex down by a thumping -38 per cent over the year. 

This mirrors what we saw in the construction figures with a number of WA's mega projects now transitioning to the production phase. 

Looking ahead to next year the fourth estimate for 2016-17 total capex increased marginally to $107 billion, but this was a miss on expectations. 

Note that with actual capex now tracking at ~$28 billion per quarter, we are now getting pretty close to the bottom. 

The wrap

Overall this was another soft result, and when you mix it in with weak construction and net exports, it looks as though Australia's economy will record a flat or negative result for the third quarter (unless the economy can pull something unexpected out of the hat, as it sometimes does - public investment, consumption, and inventories being the key candidates). 

Even with inflation below the target range, markets don't want to believe that rates will fall any further, preferring to note that at least the end of the downturn is in sight. 

Looking on the positive side, capex is now rising again in Queensland, with the Sunshine State having taken most of its pain betweeen mid-2013 to early 2016, while Western Australia is at least getting relatively close to the nadir now. 

In fact, the expectations for total capex show that the bottom will be in soon enough.

It's just that we have a bit more pain to go before the mining cliff is finally behind us.