* Business investment -3.9 pct in Q3, vs forecast +1.0 pct
* But spending plans for all 2009/10 revised up sharply
* Net, leaves intact expectations for rate rise next week
By Wayne Cole
SYDNEY, Nov 26 (Reuters) - Investment by Australian businesses slipped unexpectedly last quarter but a sharp upward revision to spending plans supported policy makers' optimism about the economy and left intact the case for an imminent rise in interest rates.
The 3.9 percent drop in private capital expenditure for the third quarter initially knocked the Australian dollar lower as it seemed to lessen the chance of a rate increase at the Reserve Bank of Australia's (RBA) policy meeting next week.
Yet a big upward revision to spending plans for all of 2009/10 suggested the dip was the lagged effect of the global credit crisis and analysts were confident a revival lay ahead.
"The number we focus on is the forward looking component and spending plans were heavily upgraded for the fiscal year, which is very positive for the outlook," said Helen Kevans, an economist at JPMorgan.
"That will have positive implications for employment and spending and probably add to inflationary pressures," she added. "We forecast a 25 basis point move next Tuesday."
The central bank holds its December policy meeting on Tuesday. If it lifts the 3.5 percent cash rate, it will be the first time it has tightened for three successive meetings.
One measure of market expectations from Credit Suisse
"Investment intentions for the coming year remain strong and help confirm the RBA's view that investment will be a strong driver of growth," said David Forrester, an analyst at Barclays Capital in Singapore.
"We do not think the data is weak enough to prevent them from raising rates by 25 basis points," he said.
FUELLED BY LNG
Overall, capital spending by private firms amounted to A$26.55 billion in inflation-adjusted terms in the third quarter.
Firms spent 2.9 percent less on equipment, plant and machinery, which will drag a little on gross domestic product (GDP) in the third quarter.
Spending on buildings and structures dropped 4.8 percent but that was more than balanced by a big rise in public spending on schools, roads and the like, which was reported on Wednesday.
"Overall activity is looking to be fairly healthy in the second half of this year," said Andrew Hanlan, senior economist at Westpac. "A housing boom has already started and there's been a massive surge in public investment."
The latest estimate for private spending for all of the year to end June 2010 was A$105 billion, up almost 6 percent on the previous estimate and well above analysts' expectations.
For a graph of past and future planned business investment, see http://graphics.thomsonreuters.com/119/AU_CAPEXA1109.gif
The upgrade was driven in large part by Asian demand for Australia's resources such as coal, iron ore and, increasingly, liquefied natural gas (LNG).
The RBA has said its own liaison with firms suggested many had revived resource projects that were shelved earlier in the year when the global credit squeeze hurt confidence.
Government figures show that as of October there were 74 advanced minerals and energy projects under construction or committed to, worth a record A$112.5 billion. There were also 267 projects undergoing feasibility studies or approval processes
One massive LNG project, Gorgon, is worth A$43 billion alone. The RBA has estimated that investment in LNG could rise from around 0.5 percent of GDP now to 2.5 percent in five years.
As a result, exports of LNG were set to expand three-fold or four-fold, putting them on a par with coal or iron ore, Australia's two biggest earners. "The increasingly positive outlook for business investment is consistent with the RBA's upbeat longer term view of the economy amid further expansion in the resources sector, strong population growth, and rising incomes," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"Cash rates need to move higher and we continue to expect a hike at next week's board meeting." (Editing by Kim Coghill) ((wayne.cole@reuters.com ; +61 2 9373 1813; Reuters Messaging: wayne.cole.reuters.com@reuters.net)) (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)