Economics
Chief economist update: The budget surplus can wait

It's rare for two economists to have a meeting of minds (you all know the economists' jokes), but I'm happy to read Jason Murphy's - an economist.

He is the author of the new book Incentivology and an article on news.com.au entitled "The worst surplus ever: 'Obsession' rocking the Australian economy" that practically followed through on Financial Standard's piece delivered a day before "What price Australian budget surplus? published on August 27.

The Australian Bureau of Statistics' (ABS) latest private new capital expenditure and expected expenditure report justifies Financial Standard's prescription that, "It's time for the government to step in and step up by applying Keynesian economics and "crowd in" business and consumer spending."

This is because "...businesses aren't even enticed to borrow and invest at these current historic low levels of interest rates" and that "the classic excuse government spending (i.e. fiscal deficits) would "crowd out" private borrowing and therefore, lift interest rates - doesn't apply to the current environment" where the official cash rate is heading to zero.

Australian total private new capex fell by 0.5% in the second quarter following a 1.3% decline in the March and the exact opposite of market expectations for a 0.5% pick-up.

That's the headline splattered on our screens when the Australian Bureau of Statistics (ABS) released its latest report on "Private New Capital Expenditure and Expected Expenditure, Australia, June 2019".

The headline numbers were the result of a 3.3% drop in capital spending in building & structures over the quarter that was partly offset by a 2.5% increase in equipment, plant & machinery.

Year-on-year, actual total capex declined by 1.1% in the June quarter, an improvement from the first quarter's 1.7% contraction but a sharp downturn from 2018's average annual growth of 1.8%.

But hold your horses.

The details of the report suggest good tidings ahead. Capital spending intentions are rising.

According to the ABS: "Estimate 3 for 2019-20 is $113,404m. This is 10.7% higher than Estimate 3 for 2018-19.
Estimate 3 is 14.9% higher than Estimate 2 for 2019-20."

Yes Virginia, Australian businesses have upped their capital spending plans in the face of multiplying challenges - trade war, global slowdown led by China and melting emerging markets, Brexit, wobbly share markets and on the domestic front, record high household debt levels, stagnant wages growth, declining property prices and weak consumer spending.

But seen in a different light, capex expectations of A$113,404 million (estimate 3) for 2019-20 remains 3.7% below 2018-19's full year actual capex of A$117,793 million.

This is consistent with the latest NAB business survey that showed business conditions and confidence both rise in capex expectations could be linked to the recent NAB business survey that although business conditions deteriorated to a reading of +2 in July from (+4 in the previous month), business confidence has improved to a reading of +4 from + 2 in June.

Then again, with both measures remaining below their long-term averages, and capex expectations (for 2019-20) down by 3.7% from their actual 2018-19 results, justifies expectations for further RBA interest rate reductions and/or our (Jason's and mine and the RBA) prescription for the government to do the Keynesian thing and forget getting the budget into surplus for now.

Read more: ABSAustralian Bureau of StatisticsFinancial StandardBrexit
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