Australia's business spending revives, boosts economy

Australian business investment surged past all expectations last quarter in a dramatically strong result that suggests the economy is growing faster than anyone thought, adding to the case for higher interest rates.

Thursday's data from the government also showed firms expected to spend heavily in 2009/10 as well, transforming the outlook for one of the hardest hit parts of the economy.

"Business investment was supposed to be the weakest part of the economy, but it's not at all," said Brian Redican, a senior economist at Macquarie. "This looks like a major turning point for Australia."

The Australian dollar firmed and bill futures shed early gains as the strong data helped offset fresh concerns about the health of China's economy, which had dominated Asian markets in recent days.

"It's a vastly stronger result than arguably anyone would have forecast six to nine months ago for Australia's investment performance," said Scott Haslem, chief economist at UBS.

"With investment intentions being revised higher, the risks of a pre-Christmas rate hike are rising."

Earlier this month, the Reserve Bank of Australia (RBA) dropped its easing bias and said rates would have to rise from record lows as the economy recovered. The market is pricing in the first hike in the 3.0 percent cash rate by December .

Australia was already one of the very few developed nations to grow in the first quarter of 2009, so dodging the global recession. Now, with business investment swinging higher, it looked like growth in the second quarter would be even better.

"GDP (gross domestic product) could well be way above expectations, perhaps even over 1 percent in the quarter," said Redican at Macquarie.

The GDP report for the second quarter is due on Sept. 2 and analysts had generally only been looking for a slight rise, if not a contraction.

Business investment had been expected to drag on growth with analysts forecasting a 5.0 percent fall in capital spending. Yet the numbers showed a 3.3 percent rise in the second quarter, and the A$24.07 billion ($19.9 billion) spent was the second highest reading on record.

Spending on plant and machinery jumped 5.3 percent, helped in part by government tax breaks for equipment like vehicles.

Investment in the mining sector did drop 6.3 percent in the quarter, reflecting lower commodity prices earlier in the year.

But that was more than compensated for by increased spending in manufacturing and other industries like construction, retail and transport.

Crucially firms were also upbeat about their spending plans for the year to end June 2010. SYDNEY, Aug 27 (Reuters)