Investors ignore the war gloom

www.smh.com.au By Matt Wade February 28 2003

Businesses shrugged off the threat of war, drought and global economic gloom and spent up on investment last quarter, but the relentless rise in oil prices continues to haunt the economy.

Capital expenditure rose 13.8 per cent in the December quarter to be up 24 per cent in 2002, the Bureau of Statistics said.

"Corporate Australia is taking advantage of solid profit growth and healthy consumer demand to both upgrade and update its assets," CommSec senior analyst Craig James said.

There was no sign that global uncertainties have taken much of a toll on future investment plans, with local firms reporting solid investment intentions.

"Australia is two years into a business investment upturn and [this] data points to it extending into 2003-04," Deutsche Bank senior economist Tony Meer said.    advertisement       advertisement

Investment in plant and equipment was up a strong 17.1 per cent in the December quarter and is expected to lead the way in the months ahead, analysts said.

Investment in buildings and structures was up 3.6 per cent in the quarter.

Investment by miners and manufacturers stood out and transport was boosted by spending by Qantas and Virgin Blue.

Official economic forecasts have been counting on business investment contributing significantly to economic growth this year, and yesterday's figures confirmed these expectations.

HSBC senior economist Anthony Thompson said the capital expenditure figures were stronger than expected considering the confidence-sapping global backdrop.

"Considering the survey was taken during January-February, when business confidence fell back under the weight of geopolitical concerns, investment plans for both 2002-03 and 2003-04 are very strong," he said.

The investment strength made an imminent interest rate cut even less likely.

"The Reserve Bank's confidence in the economic outlook has been reinforced by the solid investment result," CommSec's Mr James said.

"With unemployment low, business and consumer spending healthy and construction activity booming, the Reserve Bank has no domestic justification to cut interest rates."

But with world oil prices reaching a post-Gulf War high just under $US38 a barrel on Wednesday night, developments overseas still pose a significant risk to the local economy.

Fears that war in the Persian Gulf will affect oil supplies and reduced supplies from major oil producer Venezuela have triggered a sharp rise in fuel prices.

Many oil market analysts believe the price of crude could soon move above $US40 barrel, pushing petrol prices higher.

Higher fuel costs could cause local businesses to review investment and employment plans and force consumers to cut spending, with negative consequences for the economy.

The Merrill Lynch Leading Indicator, released yesterday, rose marginally in December but points to slower economic growth in Australia.

"We expect the leading indicator will continue to point to a slowing economy over coming months. However ... the slowdown in the Australian economy over the next six to nine months is not expected to be severe," Merrill Lynch Australian economist Trent Barnett said.