Business investment surged by the most in 16 years last quarter as the booming mining industry spent furiously on expanding output, a strength that sets the resource-rich country apart from most of its developed peers.

Wednesday’s data showed investment jumped 12.3 per cent in the third quarter to an inflation-adjusted record of $37.29 billion. That easily outstripped forecasts and came on top of an upwardly revised 6.2 percent gain in the second quarter.

The spending binge augured well for healthy economic growth in the third quarter and helped lift the local dollar a third of a cent to $US1.0060.

It also led investors to slightly trim bets the Reserve Bank of Australia (RBA) would cut interest rates at its policy meeting next week, though much depended on events in Europe.

“These are very, very solid numbers with growth across all sectors and not just mining,” said Brian Redican, a senior economist at Macquarie. “It truly confirms the RBA’s optimism on investment will drive growth.”

“But while this data shows there’s little domestic reason to cut rates, Europe is still the defining factor,” he added. “With no policy meeting in January, the RBA may feel it’s better to take out an insurance cut now. It’ll be a very close call.”

Some of the major miners this week did warn that expansion plans could be slowed if the European debt crisis morphed into a truly drastic downturn in the global economy.

The central bank holds its next monthly meeting on December 6 and then does not meet again until February 7. It cut its cash rate by 25 basis points to 4.5 per cent this month, the first easing since early 2009, citing lower inflation.

Investors are still inclined to believe it will ease next week, with interbank futures implying around an 85 per cent probability of a cut to 4.25 per cent.

An added complication for the RBA is that the jump in investment means data on gross domestic product (GDP) due the day after its meeting could show the economy grew by at least 1 percent in the third quarter, compared to the previous quarter.

The RBA has long expected investment to sustain the economy as the resource sector ramps up output to meet demand from the industrialisation and urbanisation of China and India.

The mining industry duly obliged last quarter lifting spending by a massive 22.1 per cent to $17.2 billion, a rise of no less than 80 percent on the third quarter of 2010.

There was also surprisingly good news outside mining, with investment by manufacturers up 9.8 per cent in the third quarter for a rise of 29 percent on the year.

Firms also upgraded their investment plans for the year to end June 2011, where a total of $158 billion is expected to be spent. That would equal 12 percent of Australia’s $1.3 trillion in annual GDP, by far the biggest share on record.

A large chunk of that spending will go on imports, everything from floating gas platforms to dock cranes and remote-guided trucks come from offshore.

But so large are the sums that there is bound to be a boost to domestic growth through profits, wages and tax receipts.

The government’s resource forecaster estimates the sector had committed to $232 billion of investment at the end of October, a rise of 34 per cent in just six months, while less advanced projects amounted to a further $224 billion.

These sorts of multi-year projects are less vulnerable to the ups and downs of financial markets.

“In a sea of external defensiveness and worry, this update of resource development projects has gotten even larger, now bursting at the seams,” said David de Garis, a senior economist at National Australia Bank.

“We have seen how large-scale engineering expenditure is boosting domestic demand as well as supporting the demand for labour when non-mining companies are more defensive.”

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