Australia | Aug 03 2006
By Chris Shaw
No one is sure whether the Reserve Bank of Australia (RBA) will increase interest rates again this year or not, but the latest results from the National Australia Bank (NAB) June quarter business survey suggest the recent rate increases are beginning to have some impact on the economy.
The survey suggests the surge in business conditions and confidence levels seen earlier in the year has now moderated, which indicates the economy has now peaked for the shorter-term. Supporting its view, the bank notes leading indicators for the current quarter indicate signs of further weakness are emerging. Despite this, it notes the economy overall is still in pretty good shape, as evidenced by the high levels of capacity utilisation and ongoing labour shortages.
The implication of these figures is consumers have again become more wary about spending, as they are now more concerned about the direction of interest rates, equities and oil prices. This is showing up in the cyclical sectors in particular, the bank noting the survey results show the retail, wholesale and manufacturing sectors in particular look weak. So does the agriculture sector, though here the outlook is being impacted by the lack of rainfall.
The survey also points to an ongoing division in the Australian economy, with business confidence levels in Queensland and Western Australia remaining high but weakening further in Victoria and New South Wales due to the impact of both weaker customer confidence levels on the back of the concerns mentioned above.
With such a divided economy the bank suggests it is becoming more difficult for the RBA to set a policy agenda, as what is needed in one state may have a negative impact in another. As a result, the bank suggests the RBA is unlikely to make any further changes to monetary policy in the short-term, preferring to wait and see what impact its action to date has had.
It ascribes only a 30-40% chance of a further interest rate increase by the end of the year, this despite the likelihood inflation will stay above the RBA’s target range of 2-3% in the short-term. It suggests there is little the RBA can do about this, but by the middle of next year inflation should have fallen back to within this target range.
Factoring in the survey results, the bank now expects the Australian economy to now show growth of 3% both this year and next year, which is a cut of 0.25% and 0.5% respectively from its previous estimates. This is based on a forecast for global growth of 4.7% next year, down from an expected 5% this year.
The lower outlook is based on the expectation growth in the US will slow further, to 2.5% next year from 3.5% this year. The bank cautions risk appears to be to the downside though, especially if the US Federal Reserve lifts interest rates any further, an outcome the National sees as unlikely as it suggests any further tightening would see conditions becoming too restrictive and trigger the need for significant interest rate cuts late in 2007.
With its Australian growth estimates lowered, the bank sees little likelihood of further improvements in Australia’s unemployment rate, expecting it to settle at the current level of about 5%. It also expects domestic demand to fall to 3% by year end, a significant fall from the annualised result of 5% seen in March. However, it expects an improvement to 3.25% next year.
With no further rate increases expected this year the bank expects the Australian dollar to gradually weaken, with our long-term bond rate also expected to move lower.