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Investment in driver’s seat

BUSINESS investment is expected to provide the source of economic growth for at least the next two years, offsetting the downturn in the building and property sector.

Two surveys released in recent weeks, by the Australian Chamber of Commerce and Industry and Dun & Bradstreet, point to capital expenditure as being the lifeline for the Australian economy. They indicate that, while major activity indicators are mixed, capital utilisation remains at very high levels relative to most of the 1990s.

Put simply, this means that the economy is operating at close to full capacity. Any expansion in demand for goods and services will have to be met by an increase in capital expenditure.

The Australian Chamber of Commerce and Industry/Westpac September quarter survey found that while new orders were down, forward projections by survey respondents for their own business, remain firm.

However, while respondents suggest this could flow through to capital expenditure plans, the labour market will soften.

The survey found that 76 per cent of respondents were working at or above full capacity, and only 24 per cent below.

One third of manufacturers surveyed were planning to increase capital spending, compared with 25 per cent during the previous quarter.

The Dun & Bradstreet National Business Expectations Survey, which looks ahead to the December quarter, paints an even more bullish picture of capital works programs ahead.

D&B Australian & New Zealand CEO Christine Christian said the capital investment expectations were the strongest in two years across all sectors.

“The relative strength in capital expenditure expectations reflects an underlying optimism for long-term growth in 2003 beyond the current slow growth in the third and fourth quarters of 2002,” she said.

“It appears that business spending is now likely to take over as the main driver of the economy as housing construction activity tails off.”

But figures released by the Australian Bureau of Statistics this week show that the construction industry still has some legs left. Loans for the construction of dwellings nationally, providing the first indicator of activity in the building industry over the next six months, rose 9.2 per cent in July. This followed a 9.6 per cent rise in June.

HIA WA executive director John Dastlik said the continued strength in construction finance reflected a spill over from a late rush of buyers taking up the Government’s first home owner’s grant before it was scaled back from $10,000 to $7,000 on July 1.

Housing prices have also jumped, providing a windfall for home owners seeking to cash in on the demand. The ABS last week released its benchmark index of established house prices showing that, in the year to June, prices around Australia increased 18.9 per cent – 4.9 per cent in the June quarter alone.

The fear among some economists is that if these price in-creases continue the Reserve Bank may be forced into a position to put the brakes on by increasing interest rates.

As BankWest economist Alan Langford explains in his economic update, the surge in prices will be a concern to the RBA governor.

“The central bank still thinks the forces of supply and demand will bring house price to heel, but if the rate of growth does not retreat very soon of its own accord, the RBA will have to be just that must more forceful in its monetary policy actions as and when global economic uncertainties pass,” Mr Langford said.

If capital expenditure pressures do continue to build up, as the two surveys indicate, it will add further fuel to an increase in rates from the RBA, to head off any possible inflationary pressures.

On the other hand, if rates are raised too early it could stump off any capital expenditure plans.

This aside, Ms Christian believes two other possible shadows may cloud businesses’ expenditure plans. The first is the effects of the drought gripping much of regional Australia and the second the future prospects for a downturn in the US and the Australian sharemarkets.

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