Australia | Aug 08 2006
By Chris Shaw
National Australia Bank’s Monthly Business Survey for June showed the May interest rate increase was starting to have some impact on the overall economy and the bank’s July survey results show more of the same as they reflect a continued downtrend in business conditions and confidence levels.
The bank’s measure of confidence fell six points to a +10 reading, while business confidence levels fell slightly to a +8 reading, an outcome the bank suggests provides evidence of a moderating in the pace of growth in the economy overall.
Its forecast of domestic demand supports such a view, the bank now targeting a full year increase of 3% this year and 3.25% in 2007, which is well down from the annualised result of 5% seen as recently as last March.
This doesn’t mean the entire economy is weakening though, as the bank notes capacity utilisation levels remain high, increasing in July to 82.8%. This is close to the peak reading of 83.1% recorded late in 2005. The other negative for the period was purchasing costs, which the bank notes rose 2% for the month thanks largely to higher transport costs as a result of continued strength in fuel prices.
It suggests the rise means inflation should remain at levels slightly above the 2-3% target of the Reserve Bank of Australia (RBA) for the rest of this year, though a return to within that range is likely next year. Supporting this view is the outcome for wage increases, as while this figure rose in July it wasn’t by enough to increase the annual rate of wage inflation.
As a result, the bank suggests the RBA will put rates on hold until November at the earliest, as any move to lift rates further is likely to create a situation where cuts to official rates could be needed next year to again stimulate growth.
From an industry perspective the bank notes those sectors doing it toughest are the retail, wholesale and manufacturing sectors, while conditions remain most difficult in New South Wales and Victoria.
There has been no change to the bank’s forecasts for the economy, as it continues to suggest economic growth will average 3% both this year and next, with inflation expected to peak at 3.25% by year’s end before falling to between 2-3% by the end of the current financial year.
Taking a global view, it suggests both global economic growth and inflation are likely to slow in coming months, with the risk to its domestic forecasts centred on a greater than expected slowing in the US economy. If this occurs, the bank suggests there is the potential for a significant impact on both business confidence levels and the equity market in Australia.