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29 November 2012

Australian CAPEX: Investment plans scaled back
Q3 real CAPEX: 2.8%; (mkt 2.0%) 2012/13 intentions: $173.35bn, implying +7%
• The ABS survey of private business CAPEX (which provides
only partial coverage of total business investment), was positive on actual spending in the September quarter but, more importantly, was negative on CAPEX plans for the 2012/13 financial year.

Private new CAPEX — Sep qtr 2012
Level, $bn Qrtly sa, real Total Building Equipment Q3 42.5 26.7 15.8 qtr 2.8 1.0 6.2 % chg yr 14.2 20.1 5.3

• CAPEX spending in Q3 increased by 2.8%. This exceeded
market expectations (+2.0%) and was broadly in line with our forecast (+3.0%)

• However, the detail for Q3 provided some surprises. • By asset, equipment spending rose 6.2%. This contrasts
with declining capital imports and was well in excess of our forecast for a 3% decline. It may well be that inventories were drawn upon to meet increased spending on equipment.

Mining Services Manufacturing
Source: ABS

24.4 15.3 2.8

2.8 5.5 –9.7

39.2 –3.9 –25.9

• Building & structures spend advanced by a modest
1.0%. This falls short of the strength reported in the Construction Work survey.

• By industry, mining CAPEX rose by 2.8% in Q3, a marked
moderation from a 10.3% rise in Q2. Manufacturing cut CAPEX further, down 9.7% in the quarter. Services surprised, up 5.5%, reversing a 4.6% fall in Q2.

CAPEX plans: 2012/13 scaled back
$bn 180 160 140 120 100 80 Est 1 Annual intentions: by estimates
2012/13

$bn 180 160 140 120 100 80

Sources: ABS, Westpac Economics

• CAPEX plans for 2012/13 were scaled back, with
downgrades across each industry. Not only do the most recent estimates imply slower growth than suggested three months ago, but the dollar value of plans was cut.

2011/12
2010/11 7.7% slippage last 6 months

• The 4th estimate of CAPEX plans for 2012/13 is
$173.35bn. This is a downgrade on the 3rd estimate, originally published as $181.5bn (now revised to $179.3bn).

2010/11 2008/09 2009/10
2009/10 3.5% slippage last 6 months

• We calculate, using average realisation ratios, that total
CAPEX plans for 2012/13 imply growth of 7%, scaled back from 17% suggested three months ago.

Est 2

Est 3

Est 4

Est 5

Est 6

actual

• By industry: mining plans imply growth of 18%,
significantly scaled back from +33%; manufacturing plans were scaled back to be even weaker, at -17%, down from -13%; while service plans are now for a decline of 3%, down from a small rise, of 1%.

CAPEX plans by industry
% chg, yr avg
Sources: ABS, Westpac Economics

% chg, yr avg
Mining Manufacturing Services Total

80
History in real terms,

80 60 40 20 0
Financial years

• The overall picture from this release is that mining
is slowing more rapidly than expected and services/ manufacturing is not positioning to fill the gap. Q3 CAPEX CAPEX spending increased by 2.8%, $1.2bn, in Q3. As noted above, mining CAPEX showed a more pronounced loss of momentum than anticipated and services CAPEX surprised, by rebounding.

60 40 20 0 -20

Expectations in nominal (calculated using avg. realisation ratios)

-20 2013f

2008

2009

2010

2011

2012

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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29 November 2012
The detailed information across the services sectors reveals that CAPEX strength in the September quarter was largely concentrated in construction (which is servicing the mining investment boom) and telecommunications (following weakness over the last couple of years). By state, it was noticeable that CAPEX spend advanced in NSW (+2.3%) and Victoria (+7.4%). This comes after weakness over the last six quarters. The prospect of follow through near-term is questionable. In WA, CAPEX growth moderated to 2.1%, from a 10% rise in Q2. While, in Qld, CAPEX actually declined in the quarter, down 6.1%. 2012/13 CAPEX plans A number of factors are weighing on business investment prospects for 2012/13. The most recent CAPEX survey indicates that CAPEX plans for the current financial year have been scaled back - across the board. This is at a time when business confidence is sub-par, domestic conditions below trend, the global outlook still fragile and the Australian dollar stubbornly strong. The mining sector is responding to the squeeze from lower global commodity prices and rising costs. What is striking is that the mining sector is scaling back immediate investment spending plans. This points to the risk that the peak in the level of mining investment is lower and sooner. It is notable that the services sectors scaled back plans for 2012/13. That is, the services sectors do not expect to build on that promising lift in Q3. Manufacturing CAPEX plans, which were weak, have softened further. The sector is feeling the squeeze from the high Australian dollar and current patchy domestic demand conditions. Looking forward, we do see the prospect of some improvement in global conditions and note that the interest rate cycle is more favourable than it was. We expect a modest recovery in world growth, to 3.6% in 2013, although downside risks remain very real. Domestically, the housing construction cycle is at a turning point. New dwelling construction edged higher in Q3, following a 6% decline over the previous six quarters. Although, the strength of the impending housing construction upturn remains uncertain, given a number of ongoing headwinds. Most likely it will take some for time for business to respond to such developments. Andrew Hanlan, Senior Economist, ph (61-2) 8254 9337
30 20 10 0 -10 -20 Sep-88

Investment by industry (CAPEX survey)
25 20 15 10 5 0 Sep-88
Sources: ABS, Westpac Economics

AUDbn
real

AUDbn
Mining Services Manufacturing
+39%

25 20

–4%

15
For 2011/12: CAPEX: $155bn Business investment: $250bn (National accounts)

10
–26%

5 0

Sep-92

Sep-96

Sep-00

Sep-04

Sep-08

Sep-12

CAPEX: by industry by asset
$bn 20
Mining

Equipment
nominal

Building & structures
Sources: ABS, Westpac Economics

$bn 20

Mining Services Manufacturing
Lift-off: +228% 3yrs to Sep ’12 +258% 2 yrs to Jun ’06

16 12 8 4 0 Sep-89

Services Manufacturing

16 12 8 4 0 Sep-13

Sep-97

Sep-05

Sep-89

Sep-97

Sep-05

CAPEX & jobs growth
% chg q/q(-4) % chg q/q(-4)
Sources: ABS, Westpac Economics

6 5 4 3 2 1 0 -1 -2

CAPEX: services + manfg'n (lhs) Employment, total (rhs)

–8% Q3 ’12 vs Q3 ‘11

-3 -4

Sep-92

Sep-96

Sep-00

Sep-04

Sep-08

Sep-12

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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