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Australia business investment skids, outlook darkens

Australian business investment unexpectedly sank by the most in over four years last quarter and spending plans for 2014/15 heralded a deeper slowdown ahead, a blow to the economic outlook that sent the local dollar sharply lower.

The disappointing report came as Australia's iconic airline Qantas Airways announced plans to cut 5,000 jobs over the next three years to help it withstand fierce competition.

(Read more: Australia's flying kangaroo slashes 5,000 jobs)

That was just the latest high-profile company to announce job shedding and will deal another blow to consumer confidence.

The weakness in business spending was particularly worrying as the Reserve Bank of Australia (RBA) has been counting on a revival in investment outside of mining to backstop the resource-heavy economy.

Sydney, Australia
Adam Jeffery | CNBC
Sydney, Australia

"It does underscore the impending hole in growth from the drag in mining-related capex that will come through over the next 12 to 18 months," said Su-Lin Ong, senior economist at RBC Capital Markets.

"What it's also telling you is that the expected pick-up in non-mining investment is pretty glacial."

Thursday's survey from the Australian Bureau of Statistics' showed firms planned to spend A$125 billion in the year to June 2015, less than the A$135 billion many analysts had hoped for.

Mining investment was cut back hard as more projects are set to be completed, while a surfeit of global supply in many resources has discouraged further expansion.

(Read more: Australia's jobs picture keeps getting uglier)

That's important as mining investment has swelled massively in recent years to reach almost 8 percent of Australia's A$1.5 trillion in annual gross domestic product (GDP).

The market reaction was immediate with the local dollar sliding half a U.S. cent to as low as $0.8916, while interbank futures narrowed the odds of another cut in rates albeit not until later in the year.

)It was only at the start of this month that the RBA had said rates were likely to stay at 2.5 percent for some time amid strength in housing and consumption and a pick-up in inflation.

A drag on growth

Thursday's report also contained bad news about recent growth with capital expenditure falling 5.2 percent in the last quarter of 2013, well under forecasts of a flat outcome.

The pullback by miners was all too evident as they slashed spending on plant and machinery by 16 percent compared to the previous quarter.

All of which implied private investment took a chunk out of economic growth in the fourth quarter and suggested some downside risk to GDP data due out on March 5. Analysts had generally expected annual growth would tick up to around 2.6 percent, but those forecasts may be shaved now.

Still, the news was not all bad. Spending plans for the current fiscal year to June 2014 held up very well, even among miners, while other industries marked up their outlook.

(Read more: Has the tide turned for corporate Australia?)

Much of the plant and machinery being cut were also imports, which should help Australia's trade account.

And all the hundreds of billions already spent on resource investment is in turn boosting export volumes in everything from iron ore to coal to liquefied natural gas.

A lot of this output is headed for China, which has a seemingly inexhaustible appetite for resources. Goods exports to China hit a record A$27.2 billion in the fourth quarter of last year, an increase of 45 percent on the same period in 2012.

As a result, net exports were likely the biggest contributor to economic growth last quarter and should stay so for some time to come.

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