Daily Commentary BY THE CURVE TEAM –

CAPEX Indicative of Economy

28th of May, 2021

The latest capital expenditure data are telling for the state of the economy.

A significant feature of capital expenditure data is that it is limited to the private sector. During covid, the economy has relied heavily on fiscal and monetary policy, so a transition back to private led growth will have to occur at some point.

Capital expenditure is an indicator of how optimistic businesses are and also contributes to the productivity of the economy, which is essential for long term growth. Actual expenditure so far has recovered pre covid levels, up 0.8% for the year following a 6.3% rise in Q1.

Considering this annual figure includes the lows of covid, this recovery is significant. This likely reflects the optimistic outlook from businesses and the economy, and generous tax incentives for business investment.

However, going into covid capital expenditure had fallen from prior years. Considering this, although estimates for 2021-2022 are up, they do not point to a boom.

The final estimate (estimate 6) for 2020-21 is up 2.2% from the previous estimate. Estimate 2 for 2021-2022 is well above last year’s estimate, which factored in covid expectations, but only 4.5% above the 2019-2020 estimate 2.

Building investment remains muted in the figures, but should be boosted as the homebuilder projects begin to be factored in. Property plant and equipment investment should remain high if the economy continues on its positive trajectory, although the recent outbreak in Victoria is a threat to this.

Josh Stewart

Associate - Money Markets