Business confidence levels strengthen

Although consumer confidence has taken a battering over the last nine months from high interest rates and record fuel prices, businesses have demonstrated stronger than expected resilience during the June quarter.

Data out from the Australian Bureau of Statistics this week on private new capital expenditure on buildings and equipment revealed surprising strength in business spending during the second quarter. This is positive news for the Australian economy given the Reserve Bank’s concerns about a potential hard landing.

The ABS’s figures showed that private new capital expenditure in Australia rose 5.7 per cent to $22.59 billion, up from $21.37 billion in the first quarter. The resources boom continues to underpin the economy as investment by mining companies played a key role in driving the stronger than expected investment figures. Mining investment jumped 21 per cent in the June quarter. In contrast, manufacturing investment fell by 2.8 per cent.

The prospect of a 25 basis point cut in the official cash rate from 7.25 per cent to 7 per cent next Tuesday seem all but in the bag, and some market commentators are even predicting a 50 point basis cut, dropping the cash rate to 6.75 per cent.

However, with signs that the economy is not slowing as dramatically as feared, Governor Glenn Stevens and his team from the Reserve Bank are not likely to be as generous now in the rate cutting stakes. The Bank is determined to get inflation back within the 2 to 3 per cent target band and it knows that inflationary pressure from Australia’s strong terms of trade is still a significant risk.

Infochoice.com.au