February 27, 2020 / 1:30 AM / a month ago

Australia fourth quarter capital spending slips, bolsters need for more RBA support

SYDNEY(Reuters) - Australian business investment unexpectedly fell last quarter led by declines in the mining and building sectors, frustrating hopes for a long-awaited pick up in spending and reinforcing expectations of yet another rate cut later this year.

FILE PHOTO: Pedestrians walk past the Reserve Bank of Australia building in central Sydney, Australia, February 10, 2017. REUTERS/Steven Saphore/File Photo

During the December quarter, investment stumbled 2.8% to A$28.5 billion ($18.8 billion), figures from the Australian Bureau of Statistics (ABS) showed on Thursday. That was far from market forecasts for a 0.4% rise and followed a downwardly revised 0.4% fall in the September quarter.

Australian firms also seemed less confident about the future, with the first estimate for spending plans for 2020/21 at A$100.2 billion, below some analysts’ forecasts of around A$120 billion.

“The capex survey disappointed again,” said Sarah Hunter, chief economist for BIS Oxford Economics.

“All sectors recorded a drop, with the weak economic outlook appearing to dampen investment intentions.”

In one encouraging sign, however, spending on equipment and machinery climbed 0.8% and likely added to economic growth in the December quarter.

Moreover, the outlook for the mining sector was positive with increase in spending intentions this year as well as next year.

The final estimate for 2019/20 showed spending plans edged up modestly to A$120.3 billion, though intentions for the service sector cooled sharply for this year as well as next year.

“We continue to expect further monetary easing, and the pressure will mount on the government to loosen policy in its May budget,” Hunter added.

The reluctance of businesses to invest is a global problem, blamed in part on the uncertainty generated by the protracted Sino-U.S. trade dispute last year and a rapidly spreading viral epidemic in China this year.

Figures due next week are likely to show Australia’s A$2 trillion annual gross domestic product (GDP) expanded around 0.3% in the quarter, slowing from last quarter, though analysts had yet to finalise their forecasts.

Such a result would see annual growth tick up to 1.9%, a below trend outcome that could force the central bank’s hand yet again.

The Reserve Bank of Australia (RBA) cut interest rates three times last year to a record low 0.75% and is keeping its powder dry for now. [AU/INT]

Financial markets imply a 50-50 chance of an RBA cut to 0.5% <0#YIB:> by May. A second cut to 0.25% is 60% priced in by year-end.

RBA Governor Philip Lowe this month said he was worried about the slow pace of business investment across the country.

FILE PHOTO: Pedestrians walk in front of a crane and scaffolding on a construction site in central Sydney, Australia, May 31, 2018. REUTERS/David Gray

“I fear that our economy is becoming less dynamic,” Lowe told a parliamentary economics committee.

“We’re seeing lower rates of investment, lower rates of business formation, lower rates of people switching jobs, and in some areas lower rates of R&D expenditure. So right across those metrics it feels like we’re becoming a bit less dynamic. I worry about that for the longer term.”

($1 = 1.5161 Australian dollars)

Editing by Shri Navaratnam

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