Resources investment continues to dive

Today’s big statistical news is the latest quarterly private fixed capital investment numbers from the Australian Bureau of Statistics – capex for short. Another quarter, another disappointment as resources investment continues to dive and non-resources investment drifts.

But there’s a little problem with the general wailing and gnashing of teeth about the failure of business to invest – the ABS figures are wrong.

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To start with, there’s a major flaw in the ABS capex survey in that it only includes about half of non-resources activity. Among other things, it doesn’t count education, health, agriculture or software – all rather important areas. And if software doesn’t count for capex in a modern business, I don’t know what does.

The NAB monthly business conditions and confidence survey tells a quite different story. Its capital expenditure index is up quite nicely. As the NAB economics team puts it:

“The capital expenditure index improved again in the month, recovering the ground lost in previous months to be well above the long-run average. At +9 index points, the capex indicator looks to be more upbeat on investment than reads from the ABS Capex survey and the National Accounts – partly a reflection of differing weights in the NAB survey, which puts less emphasis on mining. In trend terms, capex in transport/utilities was the highest (+16 points) and construction was lowest (-2 points), which may reflect the impact of rapidly falling mining investment.”

NAB’s chief economist, Alan Oster, attributes a dip in capacity utilisation partly to improved capex, suggesting it’s more a matter of rising capacity than falling demand.

This would be unequivocally good news. It also is necessary news if Scott Morrison’s budget growth predictions are to come true. ScoMo is betting on a 3.5 per cent real lift in non-resources investment this financial year just to keep Australia growing at last year’s pace.

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The apparent lack of non-resources investment has long concerned the Reserve Bank. More than that, it’s been driving the Martin Place mandarins crazy. Business has cheap money, a lower dollar, very low inflation, population growth, negligible wages growth – what more does it need to stir the “animal spirits”?

In trying to explain the lack of capex momentum, the RBA has suggested that part of the problem is the bits of the economy growing most now aren’t capital intensive. The services industries don’t need the plant and equipment primary and secondary industry do.

So don’t worry too much about the ABS capex count. It’s not quite what it seems to be.