Australia business investment dips in Q1, outlook sharply upgraded

© Reuters. FILE PHOTO: Construction workers go about their day near scaffolding at a construction site in central Sydney, Australia, September 11, 2018. REUTERS/David Gray

By Wayne Cole

SYDNEY (Reuters) -Australian business investment fell unexpectedly in the first quarter as floods and bottlenecks hit building work, though firms sharply lifted plans for spending in the year ahead in a boost to the economic outlook.

Data from the Australian Bureau of Statistics out on Thursday showed private capital spending dipped a real 0.9% in the March quarter, from the previous quarter, missing forecasts of a 1.5% increase.

Spending on buildings fell 1.7%, offsetting a 1.2% rise in investment in plant and machinery which is important as this will directly contribute to economic growth in the quarter.

Promisingly, firms upgraded spending plans for the year to June 2023 to a strong A$130.5 billion ($92.49 billion), up almost 12% on the previous estimate and above the A$122 billion analysts had looked for.

The report echoes data showing construction work done fell 0.9% in the first quarter as bad weather and supply shortages dragged on activity, particularly in housing where building costs rose at the fastest pace in 21 years.

All of which suggests some downside risk to gross domestic product (GDP) due next week where analyst forecasts had ranged from quarterly growth as low as 0.2% to as much as 1.0%.

The main unknown is household spending on services, which could have been hit early in the quarter by a sudden outbreak of the Omicron variant of COVID-19.

Retail sales did rise a solid 1.2% in the quarter to a record high A$93 billion in real terms with consumers not yet deterred by surging goods prices.

However, much of this demand was met by an unusually steep increase in imports which means trade could subtract as much as 1.5 percentage points from GDP in the quarter.

Given that drag, headline GDP might show little growth even though domestic demand was very strong.

The Reserve Bank of Australia (RBA) was confident enough in the recovery to raise interest rates by a quarter point to 0.35% this month, the first hike since 2010, and to flag more ahead.

Markets are wagering on another quarter point rise to 0.60% in June and a string of moves to 2.5% by year end.

Most economists argue market pricing is too aggressive given households hold record amounts of debt and are exposed to rising borrowing costs.

Yet, hawks were emboldened this week when New Zealand's central bank hiked by 50 basis points to 2.0% and projected rates of 3.5% by year end.

($1 = 1.4110 Australian dollars)