THE WEEK AHEAD: Fall in business investment won’t stop December rate rise

During the week, results of the latest motor vehicle census were released. But somewhat surprisingly, especially given then that cars are the second biggest purchase in many people’s lives, the data attracted little attention.

The figures showed that there were just over 12 million cars on Australian roads as at the end of March. Not only was this the first time the car population exceeded 12 million, but the figures also revealed that an extra 180,000 cars were added to our roads in just the past year.

When you add in other vehicles such as trucks, buses and motorcycles, the motor vehicle population was put at just under 15.7 million, up almost 380,000 vehicles over the past year.

Understandably, given the global financial crisis, the number of cars per head of population actually eased over the past year, from 563 cars per 1,000 people to 552 cars. But the number of motor vehicles continued to outpace population growth. And when you consider that population is growing at the fastest rate in 40 years, this is no mean feat.

There are currently 720 motor vehicles per 1,000 people in Australia, or very close to three vehicles for every four people – men, women and children.

Amongst other interesting statistics, the average age of vehicles on the road is just under 10 years. Also there are fewer Holden, Ford and Mitsubishi cars on the road now than a year ago, but there are more Toyotas. Actually, one in every four cars on the road is a Toyota. The biggest gain over the past year was by Audi, with almost 17% more on Australian roads, while Volkswagen wasn’t far behind in the growth stakes, up 14%.

But the key issue that emerges from the motor vehicle census is that the number of vehicles per head of population continues to increase. And with population growth likely to remain firm – especially via immigration – that means even more vehicles and more demands on the road system.

The evidence is that the road system is already under strain, putting pressure on all forms of governments to increase road funding and increase resources for planning issues. Figures produced by Austroads show that the average travel speed on major urban roads and freeways has consistently fallen in all mainland states over the past four financial years. In fact, travel speed is slower, and congestion indicators are higher, than a decade ago.

Overall, faster population growth is in Australia’s interest, serving to address the challenges of an ageing population. But governments must be up to the task on planning issues – whether it be housing, transport or the environment. The Reserve Bank has been putting greater emphasis on supply issues, and with good reason.

The week ahead

Whether the Reserve Bank lifts rates for an historic third straight month all gets down to one key statistic – business investment. The business investment (capital expenditure) figures are released on Thursday. And while the September quarter results are important, it is the estimates of future spending that the Reserve Bank will be closely watching.

Overall, we expect that investment fell by 4% in the September quarter after lifting by 3.3% in the previous three months. That would only be the second quarterly fall in two years, so it wouldn’t unduly trouble the RBA. But it’s the outlook that is of major interest.

Over the past decade, businesses have tended to upgrade financial year investment plans by around 7% in the September quarter. So if planned investment for 2009/10 is lifted from $90 billion to around $97 billion, the Reserve Bank would have few qualms about hiking rates at the December Board meeting.

While the investment figures dominate the coming week’s calendar, there are a few other events to also watch. Car sales data for October is released on Monday with construction work figures issued on Wednesday. Reserve Bank Deputy Governor Ric Battelino also delivers a speech to a housing conference on Wednesday.

The car sales figures should be encouraging. CommSec estimates that sales rose by 5.5% in seasonally adjusted terms in October. If we’re right with our forecast it would be the second highest monthly gain in five years. And if sales lift by more than 6.1%, it would be the best result in eight years. The Government’s tax break to small business is certainly buoying car sales but low new car inventories, competitive deals and rising car affordability are also supporting the car market.

The construction work data for the September quarter is important because they include figures on residential work completed – estimates that plug into the GDP (economic growth) equation for the quarter.

In the US a solid batch of economic data is scheduled before Thursday’s Thanksgiving Day holiday. On Monday, data on existing home sales is released while the latest economic growth (GDP) estimates are issued on Tuesday together with consumer confidence and home prices. On Wednesday, data on durable goods orders, personal income and spending and new home sales are scheduled together with the minutes of the November 4 Federal Reserve meeting.

Will Americans have reasons to be thankful? Well, the data should confirm that economic recovery is underway. But for many, the nagging worry is whether recovery can be sustained without Government assistance or super-low interest rate settings. Time will tell. But the data should show that the US economy grew at a 3.25% annualised pace in the last quarter while the stock of unsold new and existing homes probably eased modestly.

Sharemarket

The old adage is that it is the ‘time in’ the market that matters most, not ‘market timing’. But that doesn’t mean that investors should have a ‘set and forget’ approach to their investments. Some industries and sectors are inherently cyclical and investors are right to adopt a more pro-active approach to their investments. Take small caps. From March 2003 to October 2007, the Small Ordinaries index almost tripled. Then the index slid through to February this year, resulting in the index lifting just 6% in six years. Now with the recovery since March the annualised growth of the index has lifted to over 12% per annum. It pays to stay on top of the trends.

Interest rates

While the Reserve Bank has started a process of “normalising” the cash rate, it certainly doesn’t want to convey the impression that it is an automatic process. While RBA Board members believe that “gradual adjustment in the cash rate would most likely be appropriate over time”, the “pace of the adjustment remained an open question”.

Each month Reserve Bank Board members sit down and assess the latest evidence on the domestic and global economies before deciding what to do with rates. Some analysts reckon that future rate hikes are ‘data dependent’. But that is a truism – each and every month that the Board meets, judgements on interest rates are ‘data dependent’. Overall, we expect the Reserve Bank to lift rates in December, but it’s certainly not a foregone conclusion and the RBA may elect to pause if the coming week’s investment figures are weak.

Currencies & commodities

Over the past fortnight, coal prices have spiked higher, as have indicators of bulk shipping costs, such as the Baltic Dry freight index. In fact thermal coal prices are up 16% over the past month. The key question for investors is whether these trends reflect short-term influences or whether there is something more fundamental at work, such as global economic recovery and Chinese demand for resources.

But while the global economy is improving, one of the key factors affecting the coal market is rail maintenance activity in the Hunter Valley Coal Chain – the world’s largest export coal operation. Major maintenance work has occurred over the past week, resulting is a longer queue of ships outside Newcastle port. At the end of October there was a queue of 20 ships off the coast of Newcastle waiting to load. This queue has since blown out to 34 ships and is projected to lift to 40 ships in the next fortnight. So while coal prices have been rising, there are no guarantees that this will continue past the short-term.

Craig James is chief economist at CommSec.