Australia business investment at 3yr low, outlook tough

[SYDNEY] Australian business investment fell to a three-year low last quarter as miners retrenched in the face of sliding commodity prices, a black mark for the economy that adds to the case for further cuts in interest rates.

Thursday's figures from the Australian Bureau of Statistics showed investment fell 2.2 per cent to A$37.47 billion (S$39.8 billion) in the fourth quarter of 2014, the lowest result since late 2011.

The Australian dollar slipped 20 ticks to US$0.7860 on the data.

Early spending plans for 2015/16 were also on the weaker side of expectations at A$109 billion, with sectors outside of mining reluctant to invest. "This is a disappointing set of numbers for those looking for a successful growth transition," said Michael Blythe, chief economist at Commonwealth Bank. "This adds to the case for the Reserve Bank to step up to the plate again next week and so I think we'll see a 2 per cent cash rate next Tuesday." The Reserve Bank of Australia (RBA) cut rates to a record low of 2.25 per cent earlier this month amid signs the economy was struggling to regain momentum.

Financial markets are fully priced for another move in the next few months, but are divided on whether it will come as soon as the RBA's March 3 policy meeting. Interbank futures imply a 52 per cent probability of an easing next week.

After a decade of massive expansion, mining investment is in retreat as projects reach completion while steep falls in prices for many commodities are forcing companies to cut costs.

Analysts at ANZ estimate annual spending on resource projects could shrink to just A$32 billion in 2017, from A$88 billion in 2014 and A$103 billion the year before.

Policy makers have been hoping other sectors would fill the investment gap, but so far the performance is patchy.

Housing is doing its part as the amount spent on home construction rose 10 per cent over 2104 to a record A$54 billion, while approvals to build new homes are at all-time highs.

Commercial construction has declined with approvals for new work falling sharply in recent months, while public spending on infrastructure will take up some slack but long lead times and political uncertainty make it unreliable. "There's a lack of animal spirits," said JPMorgan chief economist Stephen Roberts, echoing a lament much-voiced by RBA officials. "It certainly adds to the case for another rate cut and we have a move pencilled-in for May."


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