Australia | Aug 28 2008
By Chris Shaw
Just when it appeared safe bet the Reserve Bank of Australia (RBA) would commence a cycle of rates cuts, economic data has jumped out and potentially upset its plans. Today’s private sector capital expenditure in the June quarter was far stronger than the market had expected.
Capex rose 5.7% against a consensus estimate of a 2.0% increase, driven largely by an 8% rise in the plant and equipment component. As TD Securities senior strategist Joshua Williamson points out, the data is suggestive of 2Q GDP growth of around 0.4% and growth for the year of about 3.0%, which is still a respectable outcome.
ANZ economist Katie Dean suggests the data is likely to see market expectations for GDP growth revised a little higher, as it shows firms have simply deferred capex until 2008/09 rather than cancelling it. This is evident from the fact estimated investment by businesses in 2008/09 is now 26.2% higher than was the case a year ago, which Commsec equities economist Savanth Sebastian notes puts it at its highest level in 26 years.
According to Williamson, the data today throws some doubt on the RBA’s actions next week, though in his view a 0.25% rate cut will still be announced as some tightening of overly restrictive policy is needed. He suggests future action is now likely to be reassessed and ANZ’s Dean agrees, as in her view, next week’s cut is a given but further cuts are now less certain.
Westpac notes the capex outcome should be supportive for the dollar, as it likely means a less aggressive pace of easing in monetary policy than had been expected. This should see some short positions in the currency closed out, as evidenced by the initial reaction of a 0.5c bounce against the US dollar immediately after the data was released earlier today.