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      News|26 May 2022

      Australia’s CAPEX falters in Q1, with cost inflation to test activity

      Thomas Rudgley
      Thomas Rudgley
      Senior Economist, Macro Consulting
      Australia’s CAPEX falters in Q1, with cost inflation to test activity
      • Private new capital expenditure fell 0.3% q/q in Q1 2022, led lower by a fall in buildings and structures investment. The weak result is in part due to the impact of Omicron on labour availability, and the postponement of construction activity in flood affected areas. Machinery & equipment volumes rose in the quarter.

      • Expectations for FY23 remain strong across mining and non-mining sectors. Today’s data provide another bullish read for buildings and structures spending, while machinery & equipment spending is also expected to lift – a sharp departure from the fall predicted in the February data. However, the exacerbation of supply side issues stemming from the war in Ukraine and lockdowns in China means a good deal of the increase in expectations is due to cost inflation, which will dampen the impetus to growth from investment activity.

      The March quarter was challenging for private business investment. Buildings & structures spending fell 1.7% q/q, partly offset by a 1.2% q/q rise in machinery & equipment expenditure. The rapid spread of Omicron cases left many firms short-handed as staff were forced to isolate or take sick leave. Flooding in New South Wales and Queensland will have also weighed on construction activity. Machinery & equipment spending is less affected by these disruptions as a high share of equipment is imported.

      Adjusting for firms’ historic realisation ratios, firms are providing a strong read on expenditure over FY23, with growth of 9.8% now expected. Buildings and structures investment is expected to drive growth, but machinery & equipment spending is now also expected to increase – a turnaround from the last read three months ago. However, the strength in expenditure plans will largely be due to higher inflation expectations, with the war in Ukraine lifting oil prices, and extended lockdowns in China worsening supply chain woes. We expect the response of mining investment to higher commodity prices will be limited.

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