Capital investment expectations reach highest level in nearly ten years

One in three (31%) Australian businesses expect to boost their long-term investments in the New Year, with capital investment projections reaching their highest level in the past nine years. This follows an overall uptick in actual capital investment over the past seven quarters and official statistics indicate productivity growth.

Dun & Bradstreet's latest National Business Expectations Survey reveals the projected capital investment index for the March quarter 2013 is at 20. This is up five points on the December quarter 2012 and follows an eight point increase the prior quarter. The capital investment outlook is now 14 points higher than the ten-year average index of six.

Actual capital investment has largely followed projections over the past eight quarters and has trended upwards since 2011. Only 11 per cent of executives increased investment in the March quarter 2011 however, 26 per cent of executives invested more in this area in the September quarter 2012. The September quarter index was seven, slightly down from June quarter figures.

Capital Investment: D&B Indexes Sep Qtr 2009 to Mar Qtr 2013

Nov 12 BEX Graph

According to Dun & Bradstreet's CEO, Gareth Jones, optimistic capital investment projections signal improved business sentiment.

"A surge in the investment index to its highest level since the September quarter 2003 highlights a renewed focus on productivity improvements. Additionally, the recent upward trend in actual investment demonstrates that an increasing number of businesses are able to fund capital projects, which will be a key driver of productivity growth over the coming years.

"A continuation of these trends will support productivity gains and in turn, support solid GDP growth in the years ahead."

D&B figures come as recently released Australian Bureau of Statistics (ABS)* figures reveal that the economy used 2.6 per cent more capital in 2011-12, which accounted for roughly 90 per cent of real GDP growth.

Improved investment expectations also flow on from a series of reductions in the official cash rate in 2012 and anticipation of the outcome at today's Reserve Bank board meeting. One in three firms considers interest rates to be the primary influence on their business in the March quarter. This is up seven points over the past two months and is ranked above fuel prices and access to credit.

"Interest rates are the lowest in three years. This has resulted in lower funding costs for business and we are seeing that fact reflected in increased expectations for investment. This is particularly true for firms in industries requiring significant upfront capital commitments, such as mining and transportation companies," said Mr Jones.

The D&B survey reveals that other key business indices are also in positive territory. Sales expectations have reached the second highest level in eight quarters, at an index of 23. This is 11 points above the ten-year average index. Additionally, profits are up two points to an index of 22, the highest level in eight quarters; and employment expectations have increased by two points to an index of three. The inventories index is at 20, the second highest level in ten years and 18 points above the ten-year average index.

Selling prices have remained largely unchanged from December quarter expectations. The index, which is now at 11 for March quarter 2013, is currently just two points above the index of nine for March quarter 2010 - the lowest level recorded since 1988.

According to D&B's Economic Advisor, Stephen Koukoulas, the rebound in investment expectations is welcome news.

"It suggests that firms are responding to lower interest rates and are taking a more upbeat view of the economy into 2013. Those upbeat views on investment are also reflected in the solid level for sales and employment expectations.

"The favourable outlook for economic growth is complemented by subdued selling prices, a sure sign that inflation pressures are absent and are a further reason why lower official interest rates from the Reserve Bank are likely to be delivered."

*This is according to the Australian System of National Accounts 2011-12 by the Australian Bureau of Statistics.

*D&B Australasia conducted the latest Business Expectations Survey in September 2012 involving 400 businesses. Each quarter 1,200 (400 per month) business owners and senior executives representing major industry sectors across Australia are asked if they expect increases, decreases or no changes in their upcoming quarterly Sales, Profits, Employment, Capital Investment, Inventories and Selling Prices.

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