Australia Business Investment Falls Unexpectedly

Australian businesses surprisingly cut back on investment spending last quarter as a slump in consumption hurt the retail sector, stirring speculation the economy might have actually shrunk in the quarter.


While firms were still very upbeat on future spending plans, Thursday's data showed investment fell 2.5 percent in the first quarter to an inflation-adjusted A$20.56 billion ($19.8 billion).

That confounded market forecasts of a 3.0 percent rise, though it followed a 7.3 percent jump in the fourth quarter of 2007.

"It is an interesting number because it means at this stage the economy is looking very weak in the first quarter," said Stephen Roberts, director of research at Lehman Brothers. "There is a risk that GDP (gross domestic product) could be negative."

The GDP report is due next week and expectations had already been for subdued growth of 0.5 percent, compared to the previous quarter.

Analysts had been counting on a healthy gain in business spending to plug a hole left by consumers struggling with surging living costs and higher interest rates.

Instead, firms cut spending on plant and machinery by 2.6 percent, a result at odds with the strength of capital imports in the quarter. Much of the weakness was in sectors sensitive to interest rates like retail, finance and property.

Business investment accounts for around 10 percent of the economy and has surged in the last few years as the global boom in commodities spurred spending on mining and infrastructure.

"In terms of GDP next week it look like business investment will make a much smaller contribution than previously expected," said Helen Kevans, an economist at JPMorgan. "We're looking at a contraction in Q1 growth."

Outlook Stronger

The Australian dollar dipped and bond futures pared early losses as the unexpected weakness of investment was seen slightly lessening the risk of another rise in the 7.25 percent cash rate.

The Reserve Bank of Australia (RBA) has lifted rates four times since August in an attempt to restrain inflation, which accelerated to a 17-year high last quarter.

"It seems the Reserve Bank has got the sharp slowdown in demand it wanted in the first quarter," noted Kieran Davies, chief economist at ABN AMRO. "But that will have to last all year to limit the need for another rise in interest rates."

On that point, the outlook for investment was much stronger than the first quarter result suggested.

Firms said they planned to spend A$84.84 billion in the financial year to end June 2009, a massive 19.5 percent more than they had planned for 2007/08 at this stage of the cycle.

"The underlying theme is very much intact that business expenditure remains quite strong, and it's being underpinned by the resources side, in particular mining and the big capex projects that go on there," said Su-Lin Ong, a senior economist at RBC Capital Markets.

Australia's resource sector has been spending heavily to expand output to meet insatiable demand from Asia and India.

All this spending can be inflationary in the short term as it pushes up costs in the construction sector, but in the long run expanding the output of the economy should help ease price pressures.

"At a time when capacity constraints remain stark with inflation set to stay above target, these spending plans which will add to the nation's productive capacity should be welcome news to the RBA," added RBC's Ong.