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Australian business investment up, miners carry on spending

August 30, 2012

SYDNEY: Australian business spending was surprisingly strong last quarter as miners splashed out on new building, underpinning expectations of brisk economic growth and countering concerns about an abrupt end to the investment boom.

Data from the government today showed investment rose 3.4% in the second quarter, from the previous quarter when, following an upward revision, it jumped 7.7%. That topped forecasts of a 2.4% gain and left capital spending up a hefty 27.4% for the year.

Sharp price falls in key commodities such as iron ore and coal combined with well-publicised delays to some proposed mining projects from miners including BHP Billiton have led to talk Australia’s resource boom was dead and buried.

If so, somebody forgot to tell the miners. Planned spending for 2012/13 rose to a record A$181.5 billion, equal to no less than 13% of Australia’s A$1.4 trillion in annual gross domestic product (GDP).

“The mining boom is not over,” said Stephen Walters, chief economist at JPMorgan. “We’ve had some commodity price weakness so the price side of the boom is weakening but the investment side still looks very solid.

“The capital spending numbers were reasonably decent, better than the 3% we were expecting, so that’s pretty good for GDP next week.”

The GDP report for the second quarter are due on Sept 5 and analysts have been tipping another robust rise of 0.8% to 1.0%. That would follow a stunningly strong increase of 1.3% in the first quarter and keep annual growth running around 4.0%.

Still banking on rate cuts

The Reserve Bank of Australia (RBA) still expects mining investment to run at around 9% of GDP over the next two years, far above its long-run average of 1.75%.

That strength has helped offset weakness in home construction with approvals to build new homes sliding by a sharp 17.3% in July. All the weakness came in the multi-unit sector, which dived 40.5% after upbeat outcomes the two previous months.

The central bank cut interest rates by a total of 75 basis points in May and June but has since sounded content to wait for the impact of that easing to be fully felt.

As a result, markets show only a slim chance of an easing at the RBA’s September policy meeting next week. But investors are still wagering on a cut by year-end, largely to offset the drag from the European debt crisis and a slowdown in China.

Interbank futures are fully priced for a move to 3.25% in November. Overnight indexed swaps, which reflect market expectations for the future path of the cash rate, currently show 2.97% a year out.

Markets showed only a muted reaction to today’s data with the Australian dollar steady at $1.0330.



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