Wayne Cole

SYDNEY, (Reuters) – Australia’s business investment dropped unexpectedly during the first quarter due to flooding and bottlenecks affecting building work. However, firms increased spending plans in the coming year in an effort to boost the economy.

On Thursday, data from Australia’s Bureau of Statistics showed that private capital spending dropped by 0.9% in March from the preceding quarter. It was below the forecasts of 1.5% growth.

The 1.7% decrease in spending on buildings was offset by a 1.2% increase in investments in machinery and plants, which are important because this directly impacts economic growth.

The firms increased their plans for spending for the year up to June 2023 by almost 12% to A$130.5 billion ($92.49 Billion), which is higher than the A$122 billion analyst had expected.

According to the report, construction work fell 0.9% in quarter one due to poor weather conditions and shortages. This was especially true in housing which saw the highest increase in building costs in 21-years.

This suggests that there is a downside risk to Gross Domestic Product (GDP), due next week. Analyst forecasts range from 0.2% quarterly growth to 1.0%.

There is still much to be known about household spending on services. This could have been affected early in the quarter by an outbreak of Omicron COVID-19.

The quarter saw retail sales rise by 1.2% to A$93 billion, a new record. Consumers are not being discouraged by the rising prices of goods.

However, this large amount of demand was not met by an uncommonly rapid increase in imports. Trade could result in a drop in GDP as high as 1.5 percent in quarter.

This drag could mean that headline GDP may not show much growth, even though there was strong domestic demand.

Reserve Bank of Australia (RBA), was sufficiently confident in the recovery to increase interest rates by quarter point to 0.335% this month. It is the first rise since 2010 and will continue to do so.

The markets are betting on another quarter-point rise to 0.60% June, and more moves up to 2.5% year-end.

Many economists believe market pricing is too aggressive, given that households are in debt to record highs and are more vulnerable to rising borrowing costs.

However, the central bank of New Zealand raised its interest rate by 50 basis points this week to 2.0% and projected rates at 3.5% for next year.

($1 = 1.4110 Australian dollars)