No change to rates outlook from election, capex data

The change of government produces little in the way of change to the outlook for interest rates in 2008 with the RBA keen to keep the lid on inflation and leaning towards hiking interest rates again in the new year.

A major driver of the economy over the last three years has been the very strong levels of capital expenditure, that is, business investment. There was a surprise 6.5 per cent dip in the September quarter after a solid performance through the first half of 2007 but it is unlikely that this is signalling the end of the investment boom.

A big drop in building construction was the major factor in the fall. This is at odds with the more important indicators of GDP growth which remain strong – investment in plant and equipment, and in people, or the creation of jobs. There may also have been some temporary uncertainty in the minds of business owners last quarter in the face of a looming federal election and the impact on credit markets from the sub-prime lending fiasco.

Indeed, the Bureau of Statistics estimates for overall capital expenditure this financial year have been lifted 6 per cent from the last quarter and are 20 per cent higher than the estimate for the corresponding quarter last year.

The latest figures on private sector borrowing collected by the Reserve Bank are pretty much in keeping with the capex figures with more modest 1.4 per cent growth in business credit in October, down from the near 2 per cent levels in previous months.

Housing credit remains flat at 0.8 per cent growth for the month, the housing market still seemingly stymied by higher interest rates. Personal credit returned to growth, 0.6 per cent for the month, after the distortions of mid year brought on by changes to superannuation.

All in all, the picture is of an economy continuing to bound along with no great sign of it running out of steam in 2008. This means inflation remains the threat and higher interest rates the defence weapon. The main risk to our economy currently comes from overseas where jitters in the US continue over the sub-prime impact on the banking sector and some chance of recession exists.