Business investment slumped to its lowest point in over 20 years in the first quarter, paving the way for a further contraction economic growth.

Economists said the data reinforced current projections for another fall in gross domestic product (GDP) of about 0.2 to 0.3 per cent in the first three months of 2009.

New private capital expenditure (capex) fell by a seasonally adjusted 8.9 per cent in the March quarter to $22.96 billion, figures released on Thursday by the Australian Bureau of Statistics (ABS) showed.

It was the biggest quarterly decline since the survey began in 1987, and the first time the figure has fallen since the September quarter of 2007.

It was also worse than the average economist forecast for a five per cent decline.

The decline was driven by a hefty 10.8 per cent fall in equipment, plant and machinery investments, particularly in the manufacturing sector.

But building investment also declined, by 4.7 per cent.

ANZ chief senior Katie Dean said the survey strongly implied business investment would also contract in future quarters.

“Today’s survey suggests the pipeline of work to be done in business investment is rapidly declining,” she said.

Commonwealth Bank of Australia chief economist Michael Blythe said it was clear some projects were being cancelled or deferred.

“While not all of this will feed into next week’s GDP estimates, today’s data will reinforce expectations of a negative GDP print,” he said.

The March quarter GDP figures will be released next Wednesday, June 3. If the data are negative, it will be the second consecutive quarter of contraction in the economy, which traditionally signals a recession.

ICAP senior economist Adam Carr said the data did not alter his forecast for a 0.3 per cent fall in first quarter GDP.

But further economic figures due before next Wednesday could prompt an upward revision if they are better than expected.

“At the moment, the partials for growth have largely surprised on the upside and there is scope for my current forecast of minus-0.3 per cent to lift to a small positive,” Mr Carr said.

“We’ve still got some partials early next week, but so far things are not as weak as I had forecast”

However, Mr Carr said there was no doubt that business investment is being reigned in.

“The big question is whether we get a complete capitulation like we have in past recessions/downturns” he said.

The ABS data released on Thursday also carried updated estimates of business expenditure plans for the 2008/09 and 2009/10 financial years.

The latest estimate of expenditure for 2008/09 was $99.259 billion, up 13.2 per cent from the estimate for the same period last year.

The estimate of expenditure for 2009/10 was $76.925 billion, down 11.7 per cent on the previous corresponding period.

“The second half of this year is looking decidedly weak, with business investment contracting, unemployment rising and the impact to households from recent policy stimulus fading,” Ms Dean said.

The bearish outlook is unlikely to surprise policymakers, with Treasury already projecting a 18.5 per cent downturn in business investment in 2009/10.

However, economists said that forecast may be too pessimistic.

“Based on these latest capex readings we expect to see a more modest nine per cent fall in real business investment spending in 2009/10,” Mr Blythe said.

“So how the capex story unfolds is crucial to determining the size and duration of the recession.”

Economists also said rising public capital spending by state and federal governments could help fill the hole left by a private sector retreat.

RBC Capital Markets senior economist Su-Lin Ong expects there will be further downward revisions to business capital spending plans in the months ahead.

“Although we are mindful that considerable resource-related capital expenditure remains in the pipeline and may well see investment hold up better in this recession compared with the last,” she said.

AAP