Australia | Aug 30 2007
By Chris Shaw
Against expectations of a 2.0% increase Australian private capital expenditure rose 6.3% in the June quarter, St George Bank chief economist Steve Ryan suggesting the number is an indication of a recovery in momentum after some weakness late last year.
Commonwealth Bank economist Joseph Capurso suggests the number implies productive capacity is growing strongly, which is exactly what is needed given the current capacity constraints in the Australian economy. This increase should eventually flow through into increases in labour productivity and economic growth in his view.
In terms of economic growth Capurso now expects next week’s quarterly GDP outcome will show an increase of 0.8%, this despite the weaker GDP implied by a slowing in exports in the June quarter.
This slowing in exports produced a widening in Australia’s current account deficit by 3% to $16 billion, which TD Securities notes is the widest since records were first kept in 1959.
According to senior strategist Joshua Williamson part of the poor export performance can be attributed to poor weather conditions, but even allowing for this the capex numbers imply stronger GDP than the market had been expecting.
As a result he expects increases to consensus estimates, his forecast being for quarterly GDP growth of 0.75%. At the other end of the range is St George’s Ryan, who anticipates GDP coming in at a decline of 0.1%.
Looking more closely at the capex figures shows the increase was driven by higher spending in the buildings and structures and equipment, plant and machinery sectors, ANZ Bank economist Riki Polygenis noting with investment spending plans still looking strong the capex cycle likely has further to run.
This is good news for the Australian economy as it will help relieve capacity constraints, so removing some of the inflationary pressures that have been building. Williamson argues this won’t be enough to change the RBA’s tightening bias though, so there is no change to his view rates are headed higher either late this year or early in 2008.