Australia’s capital expenditure to drop in coming years on slide in mining investment

The Australian government has been positive regarding the better economic conditions, especially, the labor market has been stronger than expected. Hence, the employment growth for 2015-2016 is expected to be revised upwardly, while the jobless rate is likely to be slightly revised downwardly for 2016 and 2017.

Even if the impacts of certain tailwinds are diminishing, particularly AUD-sensitive services exports and housing, business conditions are strong, said ANZ. However, investment outlook continues to be weak. Capital expenditure is likely to fall in the coming few years due to fall in mining investment and weak investment in non-mining business. Even though the NAB quarterly survey indicated that the rebound in CAPEX plans for the coming twelve months are underway and is in line with the robust business conditions, this has never been proper directive to the outcomes of non-mining business investment recently.

However, leaks in the Budget implies either a reduction in  the company tax rate or widening of major businesses of the investment incentives provided to small business in 2015’s Budget. There is also an increased keenness for infrastructure.

Meanwhile, last week, China’s steel prices surged, dragging the Australian dollar and iron ore prices with them. Some of the increases in iron ore prices are expected to be driven fundamentally; but there seems a possibility of overshoot, according to ANZ. Australian Treasury forecasters are likely to be of the same opinion, added ANZ.

“We expect Treasury will factor in something close to USD44/tonne (FOB)”, said ANZ.