Capex brings cheer

"You can't make people be confident, I certainly can't. I've allowed the horse to come to the water with cheap funding. I can't make it drink."

This was then RBA governor Glenn Stevens' statement to the House of Representatives Standing Committee on Economics in his August 2014 testimony. His frustration was understandable for after taking the official cash rate from 4.75% in 2011 to 2.5% in 2014 in a succession of rate cuts, and then to 1.5% (where it is currently), and businesses' animal spirits weren't lifting.

My database shows that, instead, actual private new capital expenditure (capex) continued to slow before registering outright negative year-on-year growth from the March quarter of 2013 to the June quarter of this year.

The Australian Bureau of Statistics' (ABS) latest update shows that Australian companies might be starting to take a sip with actual private new capital expenditure recording the first positive year-on-year reading - up 2.3% in the September quarter - after 16 straight quarters of decline.

Actual spending on buildings & structures increased by 2.4% in the year to September and investment in plant, equipment and machinery rose by 2.1% - both reversing the previous quarter's year-on-year declines of 2.9% and 1.3%, respectively.

The improvement in capex expectations - "Estimate 4 for 2017-18 is $108,922m. This is 1.6% higher than Estimate 4 for 2016-17. Estimate 4 is 5.6% higher than Estimate 3 for 2017-18." (ABS) - indicates continued expansion in capex spending going forward.

This outlook is consistent with the NAB business survey that showed business conditions hit an all-tome record high in October and business confidence remaining above its long-term average (+8 versus +6).

The latest AiG performance of manufacturing index's sharp reversal to a reading of 57.3 in November from 51.1 in the previous month also fits with the optimism over the outlook for capex.

The OECD and those calling for a rate hike by the second half of next year might be correct after all.

The improvement in capex indicates business optimism over their revenues and profitability over the coming months.

One that would spill over into increased employment and (hopefully) higher wages growth, underpinning stronger household consumption and further gains in sales and profits and investment.

Read more: CapexOECDAustralian Bureau of StatisticsGlenn StevensHouse of Representatives
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