All about business

Australian business investment unexpectedly fell in the first quarter after the central bank raised borrowing costs to the highest in almost 12 years, prompting companies to scrap spending plans.

Capital spending fell 2.5 percent from the fourth quarter, when it climbed a revised 7.3 percent, the Bureau of Statistics said in Sydney today. The median estimate of 23 economists surveyed by Bloomberg News was for a 3 percent gain.

Falling investment suggests Australia's 17-year economic expansion may cool as companies spend less on machinery and construction. Central bank Governor Glenn Stevens, who raised the benchmark interest rate in March for the fourth time in seven months, aims to slow the economy enough to bring inflation back within his target range of between 2 percent and 3 percent by 2010.

“We're starting to see the first signs of a slowdown in business investment going forward,'' said Shane Oliver, chief economist at AMP Capital in Sydney. “Business confidence has taken a big hit, the cost of funding is still high, and the outlook for economic conditions has deteriorated.''

The Australian dollar dropped to 96.19 U.S. cents at 12:07 a.m. in Sydney from 96.35 cents before the report was released. The yield on the two-year government bond slipped 2 basis points, or 0.02 percentage point, to 6.89 percent.

Spending on buildings and structures fell 0.8 percent and company investment in new plant and equipment declined 2.6 percent in the first quarter, today's report showed.

Investment Plans

Companies forecast investment of A$87 billion ($84 billion) in the year ending June 30. That was 1.3 percent more than they estimated three months ago.

They plan A$84.84 billion of new investment in the year through June 2009, which is 6.9 percent more than they estimated three months ago and 19.5 percent more than the corresponding forecast last year.

Today's report supports the central bank's view that the domestic economy will slow this year and next. The Reserve Bank cut its forecast this month for annual economic growth to June 2009 to 2.75 percent from the 3 percent it predicted three months earlier. First-quarter GDP figures will be published on June 4.

Consumer confidence held close to the lowest in 15 years in May, companies were pessimistic for a fourth consecutive month in April, and home-loan approvals fell in March to the lowest level in almost three years, reports this month showed.

`Slower Growth'

Cooling domestic demand “will help to reduce inflation over time,'' the Reserve Bank said on May 9. “Wage pressures are likely to ease in due course as the rate of unemployment is forecast to increase, in line with slower growth.''

Businesses boosted spending last year as surging demand from China for iron ore and coal spurred mining companies, including Rio Tinto Group, to expand ports, railways and mines, pushing the nation's unemployment rate close to the lowest since 1974.

Rio Tinto, the world's third-largest mining company, may spend $10.2 billion to expand output by 26 percent at its Queensland alumina refinery amid forecasts that Chinese demand for the metal will rise 15 percent a year through 2015, Dick Evans, chief executive officer of the aluminum unit, said on April 30.

Mining Boom

The booming mining sector, which is forecast to boost Australia's terms of trade, a measure of export income, by 20 percent this year, is among reasons the Reserve Bank increased the benchmark official cash rate target to 7.25 percent in March. It also raised borrowing costs in February, November and August.

Policy makers spent “considerable time'' discussing the case for a further rate increase when they met on May 6, according to minutes of the meeting published last week.

“In the great scheme of things, today's report adds to broad-based evidence the economy is starting to slow,'' AMP's Oliver said. “That will enable the Reserve Bank to leave rates on hold.''

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