Australia’s Company Investment Growth Slows to 0.6%

By Jacob Greber

Nov. 27 (Bloomberg) -- Australian business investment growth slowed in the third quarter, adding to signs turmoil on global financial markets is buffeting the nation’s economy.

Capital spending rose 0.6 percent from the previous three months, when it gained a revised 7.4 percent, the Bureau of Statistics said in Sydney today. The median estimate of 14 economists surveyed by Bloomberg News was for a 0.8 percent gain.

Today’s report suggests some companies are paring expansion plans amid a drop in consumer spending and fallout from market turmoil that prompted central bank Governor Glenn Stevens to cut borrowing costs since early September by two percentage points, the most since a recession in 1991. Corporate spending may cool further in coming quarters after business confidence tumbled to a record low last month.

“With the outlook for investment looking weak, the Reserve Bank will be forced to continue to cut rates aggressively,” Ben Dinte, an associate economist at Macquarie Group Ltd. in Sydney.

While today’s figures “suggest investment will hold up for the rest of the year” there will be a “significant reduction in spending plans for the 2010 fiscal year when firms are surveyed” next,” Dinte added.

The Australian dollar traded at 65.30 U.S. cents at 12:40 p.m. in Sydney from 65.27 cents just before the report was released. The two-year government bond yield fell 2 basis points to 3.22 percent. A basis point is 0.01 percentage point.

Future Spending

Investment by manufacturing companies dropped 0.7 percent in the quarter, while miners increased spending by 7.1 percent, today’s report showed.

Spending on buildings and structures gained 6.6 percent and company investment in new plant and equipment slid 2.4 percent in the third quarter.

Companies forecast investment of A$102.7 billion ($67 billion) in the year ending June 30, 2009, which is 1.6 percent more than they estimated three months earlier and 21.9 percent greater than the corresponding prediction last year.

“The short-term business environment may be gloomy, but Australian companies are focused on the big picture,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “Rather than making a knee-jerk response and cutting spending, corporate Australia is investing for the longer-term.”

The Reserve Bank of Australia this month cut its forecast for economic growth in 2008 to 1.5 percent from the 2 percent it predicted in August. The International Monetary Fund has forecast global growth of 2.2 percent next year, a level it called the “equivalent of a global recession.”

Commodity Exports

Prime Minister Kevin Rudd said yesterday the government may allow its budget to go into deficit if the global economic slowdown worsens. The government may borrow to invest in hospitals, schools and ports to spur job creation, Rudd said.

Some companies are reducing spending on concern fallout from the global credit crisis will erode demand for exports such as iron ore and coal.

Fortescue Metals Group Ltd., Australia’s third-largest iron ore exporter, has suspended work on a railroad carrying the steelmaking ingredient, signaling a deepening slump in demand from Chinese customers.

Mining companies may delay $50 billion of projects as credit markets seize up and metal prices plummet, Credit Suisse Group said last month. Contract iron ore prices may drop by half next year, the first decline in seven years, Australia and New Zealand Banking Group Ltd. predicted last week.

Interest Rates

A National Australia Bank Ltd. survey of more than 400 companies conducted between Oct. 23 and 30 found business confidence fell to the lowest level since the series began in 1989.

Today’s capital spending figures are “on the soft side, consistent with a slowing economy,” said Shane Oliver, senior economist at AMP Capital Investors in Sydney. Still, “businesses are still spending, so it will add to marginally positive gross domestic product growth in the third quarter.”

Central bank policy makers will cut the overnight cash rate target by three quarters of a percentage point to 4.5 percent on Dec. 2, according to nine of 17 economists surveyed by Bloomberg News last week. Five tipped a half-point reduction and three expect a one-point cut.

The bank cut its benchmark interest rate by three quarters of a percentage point this month, adding to a 1 percentage point reduction in October and a quarter-point adjustment in September.

Australia’s economy grew 0.3 percent in the second quarter, the slowest expansion in more than three years. Third-quarter growth figures will be released on Dec. 3.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net