Macro

There is an investing narrative that suggests with three interest rate cuts in the past few months, companies are about to unleash a capex spending spree. I’m skeptical. Yesterday’s capex data, which surveys both past and future company capital expenditure, supports my skepticism.


I need to preface all of this with the observation (raised before) that for some sectors, forecasts are misleading. You need to be careful about which conclusions are safe to draw. Some sectors are good at forecasting capex, and some are terrible.

One of the only growing sectors is mining equipment:



But for mining, the good news gets wiped out by the bad.

Once you get into the industrial sectors, a bleak outlook is standard:




I have a keen interest in the construction sector, which I think will be patient zero if the Australian economy falls into recession. The construction sector has poor growth forecast.

Unfortunately, construction capex forecasts are historically inaccurate. I’m reluctant to read too much into construction forecasts, even though they support my thesis.

Optimists can seize on the one good subsector out of about 20:


No white horse, maybe a white flag?

  • The Reserve Bank has effectively run out of interest rates cuts to stimulate the economy
  • The Reserve Bank wants the federal government to spend on capital expenditure
  • The federal government refuses to spend more on capital expenditure
  • The federal government wants companies and state governments to spend more on capital expenditure and research
  • There are few property transactions, putting pressure on state government budgets which rely on stamp duty
  • State governments also can’t spend more on capital expenditure – the federal government collects most of the taxes and is focussed on delivering surpluses
  • Companies are refusing to spend more on capital expenditure due to the uncertain outlook

Far from riding to the economy’s rescue, the private sector seems to be hunkering down and not spending.

Investment Outlook

My view is that without considerable federal government stimulus, there is nothing on the horizon to suggest a recovery in the Australian economy. On the contrary, there is a range of risks which could result in considerable economic downside.

For our investors and superannuation clients, cognisant of the risks, we are carrying close to minimum weight in Australian stocks.



Comments

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Harry

Am I missing something Damien as being in business I get no feed back that times are tough. The real estate sector consistently has busts and booms so thats never a surprise . There is an amazing amount of money out there due to the SMSF and Super Funds Industry. If Federal government wanted to spend money on infrastructure its not because of shortage of investors. What lacking in the country over the past 20 years is simply a thing called..... leadership.

Patrick Fresne

I agree with you on that last point, Harry. However, I think your scepticism regarding the economic slowdown in Australia is most likely misplaced. I regular monitor the number of jobs advertised on Seek, and what I am seeing would seem to support the arguments presented in this wire. Over the past four months or so there has been a substantial decrease in the number of jobs advertised in a number of key areas.

Damien Klassen

I think the key issue is not that the economy is crashing. It isn't (yet?). The issue is that with emergency interest rate settings, central bankers were expecting a business boom that is simply not occurring. I also agree that some leadership would be great.