Australia appears to be accelerating out of the economic downturn at a far quicker pace than many economists had first imagined, increasing the risk of an interest rate rise this year.

Economists are upgrading their growth expectations for next Wednesday's June quarter national accounts after new data showed surprising strength in business investment.

Ironically, the government also released its first progress report on its nation-building economic stimulus plan - designed to fill the gap in what was supposed to have been a major slump in business investment.

In the May budget the government had forecast an 18.5 per cent tumble in business investment in 2009/10.

"When it comes to supporting jobs, when it comes to supporting small business, it's an A plus. The stimulus package is working,'' Labor frontbencher Mark Arbib told reporters.

Kick to inflation feared

However, the economy now faces a pick-up in private investment just when the government is ramping up its public-sector infrastructure and investment projects.

Commonwealth Securities economist Savanth Sebastian said with the private and public sectors both competing for resources, an added kick to inflation cannot be ruled out.

The commonwealth coordinator-general's progress report is wary of such potential price pressures.

"The government will continue to monitor the construction sector for any signs that fiscal stimulus is leading to capacity pressures,'' the report said.

Mr Sebastian said there was now a "significant risk'' to his call that official interest rates would stay on hold until next year.

"This may be too conservative,'' he said in a research note. "There is the real risk that the Reserve Bank could decide to implement the first rate hike by Christmas rather than the New Year.''

Boost for GDP

Based on data known so far, some economists say June quarter gross domestic products (GDP) could have grown by around 1 per cent, expanding on the slim 0.4 per cent growth in the three months to March.

The economy contracted by 0.6 per cent in the December quarter.

But the Federal Government is refusing to make any predictions about next week's GDP.

"I'm not a soothsayer,'' Small Business Minister Craig Emerson told ABC TV today, adding he hoped the GDP figure would be positive.

Dr Emerson attributed Australia's relatively strong economic performance throughout the global financial crisis to the government's economic stimulus packages and the "great attitude'' of local businesses.

Today's data from the Australian Bureau of Statistics (ABS) not only showed unexpected strength in actual business capital spending, but also a significant upgrade to investment intentions for the current financial year.

Capital expenditure grew by a seasonally adjusted 3.3 per cent in the three months to June to $24 billion.

Surprise result

This was a surprise result, after economists' forecasts had centred on a 5.0 per cent decline.

The rise was led by a 5.3 per cent jump in equipment, plant and machinery spending, a component that feeds directly into the gross domestic product (GDP) calculation.

"While it could be argued that the rise in capital spending in (the June quarter) was just a bring forward due to businesses taking advantage of government investment tax breaks, this does not appear to be the case,'' Macquarie Research economist Benjamin Dinte said in a research note.

"Investment intentions appear to have turned a corner, with firms significantly upgrading their capex plans for (2009/10) compared to three months ago, which is consistent with the recent rebound in business confidence and conditions."

The data showed the third estimate of capital expenditure for 2009/10 was $90.56 billion, 15.4 per cent higher than the previous estimate.

AAP