Australia | Jun 01 2006
By Rudi Filapek-Vandyck
There is a strong correlation between the booming Chinese economy and ongoing buoyant conditions in the Australian business sector, Commonwealth Bank economist Joseph Capurso argues.
The latest ABS data show business spending on capital expenditure (capex) is now growing at a 28.9% annual rate. Capurso draws a direct link with Chinese business investment which is growing at a 28% annual rate. He believes strong Chinese demand for commodities is encouraging record levels of Australian mining investment.
The mining investment story in Australia is well known, Capurso says, adding less well recognised is the impressive level of Australian manufacturing investment. He believes the high return on equity in manufacturing is encouraging additional investment and this despite increased foreign competition (from China among others and because of the high Aussie dollar) and despite the slow-down in the domestic housing market.
Just like economists elsewhere, the CommBank economist is of the view that business capital spending in Australia will remain strong over the next 18 months.
Mark Rodrigues at ANZ Bank believes this will not have an impact on domestic interest rates. Rodrigues sees other developments in the economy to push the Reserve Bank of Australia to raise interest rates one more time this year.
Stephen Koukoulas at TD Securities begs to differ. Koukoulas believes the current prospects for business investments are for further expansion "at a break-neck pace" for another year and a half. He adds there are now clearly risks for overheating and suggests the RBA may have to step in to prevent this from happening.
Extra capacity is necessary in the current climate, Koukoulas acknowledges, but this may be a case where too much is simply too much. He refers to history showing too much investment can end in tears when firms are left with too much spare capacity when conditions soften.
Three examples that spring to mind, he says, are Australia in the late 1980s, Japan at a similar time and the US in the late 1990s.
Koukoulas believes Australia could be progressing to a point where we are seeing too much investment too late in the cycle. This will lead to a glut of capacity down the track, he assures.