Daily Commentary BY THE CURVE TEAM –

Capital Expenditure Expected to be Soft Once Again

28th of November, 2019

With the start of the week firmly focussed on updated to the outlook by the Reserve Bank, today CAPEX data release will be crucial.

As with most speeches by the RBA that are followed by questions from the floor, the real insight lies in how the speakers respond the the challenging questions. Their unprepared responses often leave hints to their personal views. After Governor Lowe spoke on Tuesday he revealed in the Q&A just how he sees the economy getting back to full employment and within the target band for inflation.

“So demographics, Asia and the intertemporal budget constraint all mean there’s a lot of saving going on and on investment, it’s depressed. The solution to this is to get businesses to invest. To give businesses the confidence to invest, expand, innovate and hire people.”

Whilst in theory this makes perfect logical sense, in reality that is a much larger challenge than it appears. With that in mind, should the economy be at the central turning point the RBA often refer to then CAPEX data should be reflecting that. Essentially, for the RBA central outlook to eventuate we need to see increases or at the very least a steadying of the recent decline of new private business capital expenditure.

Currently the market expects to see today’s ABS data to print at 0% change Q/Q so any positive surprise would add some validity to the RBA central outlook. However, there has also some expectation from market participant we may see a further decline and continuation of last quarters fall, this time lead by falls in equipment purchases.

In what might be some foreshadowing of today’s release, yesterdays Q3 construction work done was once again in decline. It must be said that this is slightly different from what the RBA suggest is our path to inflation as construction work is heavily reliant on residential construction, however there was no evidence in the data of an upward trend developing in construction of non-residential assets that would be brought about through business expanding and investing.

Matthew Dunshea

Client Relationship Manager