Australian Investment Boom Eases in Third Quarter

Australian business investment unexpectedly fell last quarter as the booming mining sector took a breather, though firms still upgraded already ambitious spending plans for coming months.

Spending on machinery, buildings and the like fell 6.5 percent in the third quarter to an inflation-adjusted A$19.64 billion (US$17.3 billion). That confounded forecasts of a 1.7 percent increase but came after two very strong quarters and investment was still up 9 percent on a year earlier.

"The headline numbers look weak but the underlying story is much, much stronger," said Brian Redican, a senior economist at Macquarie. "Expectations for future spending were extremely upbeat and that's going to keep driving the economy," added Redican.

The Australian dollar initially eased on the figures but soon steadied, while the stock market was up over 1.6 percent.

Firms surveyed by the Bureau of Statistics planned to spend A$83.83 billion in the year to end June 2008, 20 percent more than they had planned at this stage for 2006/07.

"That's the positive news from the survey and I think it's the much more important news," said Stephen Walters, chief economist at JPMorgan. "The capex boom we've enjoyed for the last five or six years still has further to run."

Capital investment has surged in the past few years as Australia's massive resource sector ramped up to meet Asia's insatiable demand for everything from iron ore to coal and gas.

Thus while investment in the mining industry dipped 3 percent in the third quarter, that still left spending up 19.2 percent on the same quarter last year.

Constructing GDP

Overall, spending on building and structures fell 9.4 percent in the third quarter, while that on equipment and machinery dropped 2.3 percent. The latter feeds directly into gross domestic product (GDP) and implied a slight drag on growth.

Still, that was balanced by figures on construction work released on Wednesday which suggested building on roads and houses and the like had contributed up to 0.5 percentage points to GDP in the quarter.

"It offsets part of the strength in the construction data," said Scott Haslem, chief economist at UBS. "Consequently, we are leaving our GDP forecast for next week at 1.1 percent, with modest upside risks."

The GDP report for the third quarter is due on Dec. 5 and analysts have generally looked for an increase of around 1.0 percent, which would lift annual growth toward a heady 5 percent.

But such speedy growth threatens to stoke inflation in an economy already short of spare capacity after 16 years of uninterrupted expansion.

Seeking to cool things down, the Reserve Bank of Australia (RBA) has raised interest rates twice in the past four months, taking the cash rate to an 11-year peak of 6.75 percent.

The vast majority of analysts suspect the central bank will have to tighten at least once more, probably in February. A Reuters poll of 21 economists taken last week showed 18 expected rates to rise to 7.0 percent or more.

Still, the latest squeeze in global credit markets could lessen the urgency for a hike if it were to seriously threaten the outlook for the global economy.