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5625.0 - Private New Capital Expenditure and Expected Expenditure, Australia, Jun 2004  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 26/08/2004   
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Feature Article - Experimental Projected Capital Expenditure Series


INTRODUCTION

This article describes the development of a new experimental projected capital expenditure series, together with some information regarding businesses reporting of expectations.


The projected series, which links actual and expected capital expenditure, has been designed to assist users in interpreting the expectations data released each quarter, especially in terms of obtaining an indicator of future trends in expenditure.


The projected series will be presented graphically as a standard part of future releases.



METHODOLOGY

In summary, the projected series applies historical realisation ratios to contemporary expectations to convert these to quarterly figures. Trend estimates of resultant quarterly time series of actual and expected expenditure are produced.


In more detail:

  • Current short and long term expectations are of varying periods depending on the quarter in which they are collected (see paragraph 12 of the Explanatory Notes). Each expectation from the beginning of the time series is confronted with the actual expenditure that occurred in each quarter to which that expectations figure related (for example, June quarter 2001 short-term expectations related to the September and December quarters 2001). The output of this is to produce a quarterly realisation ratio for each expectations estimate through time.
  • Five-year average realisation ratios are then calculated. These average realisation ratios are applied to contemporary expectations to produce estimates of projected expenditure for forthcoming quarters.
  • These estimates of likely expenditure are then linked with the current price time series of actual expenditure to produce a quarterly time series which extends to the end point of the contemporary expectations series. For December, March and June quarters, the end point is 30 June of the following financial year. For September quarters, the end point is 30 June of the current financial year.
  • The resultant quarterly time series are then produced in trend terms. The same aggregation structure which is used to produce seasonally adjusted and trend estimates of actual capital expenditure is used for these projected series. (See Paragraphs 33 to 38 of the Explanatory notes for more information regarding seasonally adjusted and trend estimates).


CAUTIONARY NOTES

While the ABS has produced these projected series to assist users in interpreting capital expenditure expectations, users should exercise caution in comparing these estimates with the estimates of actual and expected expenditure contained elsewhere in this release. In particular:
  • The trend estimates which feature as key indicators in this release are based on the time series up to and including the current quarter, while the projected trend estimates are based on a time series which concludes at the end point of available expectations. Paragraphs 36 and 37 of the Explanatory Notes describe the potential impact of future estimates on the end point of the trend estimate, and this is shown in more detail in the "What if ..." analysis on page 24 of this release.
  • Key indicators of actual expenditure in this release are presented in volume terms, which removes the impact of price changes on the time series. Tables 1 and 2 of this release also present actual and expected expenditure in current price terms. The projected series, however, are compiled using current price estimates for the actual component of the time series (that is, prices as they related to the particular quarter) and expectations which are generally based on prices for the quarter in which they were reported. The section "Business reporting of expectations data", below, provides more information. The impact of price changes can have a significant impact on some series. For example, trend estimates of total expenditure in volume terms have been increasing in recent quarters, while current price estimates have been decreasing.
  • The projected series is based on five-year average realisation ratios. As is discussed in paragraphs 24 to 27 of the Explanatory Notes, there is some volatility in realisation ratios over time and so it is not necessarily the case that contemporary expectations will be realised in line with the average of the past five years. The following tables show the five year average realisation ratios used to create the projected series, together with the highest and lowest realisation ratios observed over this five year period.

Buildings and structures
Equipment, plant and machinery
Total
Mining
Manufacturing
Other selected industries

September quarter(a)
5 year average realisation ratio
0.47
0.51
0.50
0.42
0.43
0.56
Lowest realisation ratio in last 5 years
0.40
0.48
0.48
0.37
0.40
0.53
Highest realisation ratio in last 5 years
0.55
0.55
0.55
0.54
0.47
0.58
December quarter(a)
5 year average realisation ratio
0.51
0.57
0.55
0.44
0.50
0.61
Lowest realisation ratio in last 5 years
0.45
0.54
0.52
0.38
0.43
0.57
Highest realisation ratio in last 5 years
0.56
0.60
0.59
0.48
0.54
0.68
March quarter(b)
5 year average realisation ratio
0.46
0.55
0.52
0.41
0.48
0.57
Lowest realisation ratio in last 5 years
0.38
0.51
0.48
0.38
0.39
0.53
Highest realisation ratio in last 5 years
0.62
0.58
0.59
0.46
0.58
0.65
June quarter(b)
5 year average realisation ratio
0.56
0.63
0.61
0.50
0.57
0.66
Lowest realisation ratio in last 5 years
0.46
0.58
0.58
0.47
0.48
0.61
Highest realisation ratio in last 5 years
0.72
0.69
0.70
0.56
0.63
0.78

(a) Realisation ratios for the September and December quarters measure actual expenditure in those quarters as a proportion of the short term expectation from the preceding June quarter
(b) Realisation ratios for the March and June quarters measure actual expenditure in those quarters as a proportion of the long term expectation from the preceding June quarter



BUSINESS REPORTING OF EXPECTATIONS DATA

A skirmish study of approximately 250 businesses was undertaken during the June Quarter to ascertain on what basis businesses report expectations data. Generally most businesses do not consider price change when estimating the cost of expected purchases. It was found that the majority of businesses estimate the price for expected purchases based on the current replacement cost.


Key Findings

Of those businesses in the skirmish study:

  • 74% of large businesses had a fixed budget for capital expenditure and purchased capital items based on a combination of planned requirements and needs as they arose.
  • The majority of small businesses (62%) did not have a fixed budget for capital expenditure, and purchased items on a needs basis (64%).
  • 12% of large businesses considered price changes when estimating the cost of expected purchases. Businesses in Mining and Manufacturing contributed over 70% of this figure.
  • The majority of small, medium and large businesses estimated the cost of expected purchases based on 'current replacement cost', (58%, 54% and 49% respectively).
  • 35% of large businesses took into account currency changes. Over 70% of these businesses were in the Mining and Manufacturing industries.
  • 57% of large businesses entered into contractual agreements with suppliers, whilst 64% of small businesses and 66% of medium businesses indicated that they did not.


EXPERIMENTAL PROJECTED CAPITAL EXPENDITURE SERIES

The following graphs, with accompanying commentary, show the projected capital expenditure series based on June quarter 2004 data, which includes expected expenditure up to and including the June quarter 2005.



TOTAL CAPITAL EXPENDITURE

In recent quarters total capital expenditure has been declining slightly in current price trend terms. Strong expectations for 2004-05 financial year when combined with the recent decline, indicate that the slight fall in expenditure is temporary and that strong growth may occur over the next year. Both Mining and Manufacturing have shown a slight decline in recent quarters but are indicating strong growth for 2004-05.

Graph: Total Capital Expenditure



BUILDINGS AND STRUCTURES

Strong expectations for the 2004-05 financial year, coupled with the existing growth in current price trend estimates, indicates that expenditure on buildings and structures will continue the strong growth of the previous two years. While little of the recent growth has come from Manufacturing, all major industry groups are projected to contribute to the growth over the next year.

Graph: Buildings and Structures



EQUIPMENT, PLANT AND MACHINERY

Current price trend estimates for equipment, plant and machinery have shown moderate decreases in recent quarters. When combined with expectations data there is an indication that this decrease will flatten out and then lead to some slight growth over the 2004-05 financial year. Mining and Manufacturing are indicating strong growth over the next year, whilst Other selected industries is projecting a decrease in expenditure.

Graph: Equipment, Plant and Machinery



MINING

The trend estimate for Mining (in current price terms) has been declining slightly in recent quarters, however levels remain historically high. Expectations for 2004-05 indicate that the expenditure will show moderate growth in future quarters. Building expenditure is the main contributor to the projected increase.

Graph: Mining



MANUFACTURING

Manufacturing current price trend estimates have shown a decline in recent quarters after reaching historically high levels. A decline in equipment expenditure was the main contributor to this decrease. The 2004-05 financial year expectations indicates that Manufacturing expenditure will show strong growth in the future, with both equipment and building expenditure contributing to the projected increase.

Graph: Manufacturing



OTHER SELECTED INDUSTRIES

The current price trend estimate for Other selected industries has been relatively flat in recent quarters. Expectations data indicates slight growth for the 2004-05 financial year, with the levels remaining at a similar level to current expenditure. Building expenditure is projected to show some growth over the next year while equipment expenditure is projected to decrease slightly.

Graph: Other Selected Industries



FURTHER INFORMATION AND FEEDBACK

For further information about the projected capital expenditure series please contact John Blanchette on Sydney 02 9268 4429.


The ABS invites comments on these experimental series. Comments can be provided to John Blanchette on Sydney 02 9268 4429 or email <john.blanchette@abs.gov.au>. The ABS aims to remove the experimental label after it has considered user comments.


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