Australia | Sep 12 2006
By Chris Shaw
Evidence is emerging the two increases in official interest rates since May are beginning to have an impact, as the National Australia Bank’s latest Monthly Business Survey shows August was the second successive month of a slowing in the Australian economy.
The bank suggests this is not necessarily a bad outcome, as the moderation is from what in its view had been reasonable levels. The outlook is a little less bright though, as it notes the survey results point to a further slowing in coming months as expectations are being revised down.
The August data showed business confidence levels falling by five points, meaning the index has fallen a total of nine points since peaking in March. This was matched by a two point fall to a reading of 10 for the business conditions index, which represents its weakest reading since the beginning of the year.
Within the index components the bank notes trading and profitability fell only moderately, while a more significant fall occurred in employment growth. In the bank’s view the data implies the trend improvement in business conditions that began in May has now stalled and is likely to reverse. Forward orders are a good indicator of this, the reading falling six points to zero, its weakest outcome since February.
On the plus side the bank notes capacity utilisation remains at solid levels and there is no sign of excess business stocks, balancing somewhat the weaker readings in other areas. As has been the case over the past several months, performance remains split across the different states and sectors. Western Australia and to a lesser extent Queensland leading the way, while from an industry viewpoint the mining and resources sectors remain strong, services continue to perform reasonably but the outlook for retailing, wholesaling and manufacturing is more subdued.
Possibly the best thing about the recent data is it has not prompted the bank to make significant changes to its views on the state of the national economy and its outlook for growth and inflation.
The bank has trimmed its GDP growth forecast for 2006/07 to 2.5% from 2.75%, though it expects this to rise gradually to around 3% during the course of 2007. Such an outcome would be below trend growth, but the bank attributes this in part to its expectation of a further slowing in domestic demand growth, where it forecasts a result of 2.75% in the 2006/07 financial year compared to 3.8% in 2005/06. Again, it expects a slight recovery to around 3.0% over the course of 2007.
This decline in demand growth will have some impact on employment, the bank expecting employment growth to slow to around 1.75% annually, producing a slight upward drift in the unemployment rate to 5.25% in 2007.
Its inflation outlook is also little changed, as the bank expects core inflation to remain around current levels of 3.25% through to the end of the year before falling back within the Reserve Bank of Australia’s (RBA) target range of 2-3% by late in 2007. Headline inflation should also drift bank into the RBA’s target range by the middle of next year in the bank’s view.
Overall the bank suggests the survey results are likely to give the RBA some comfort that its tightening moves are working as planned and slowing the economy without creating conditions that are too restrictive. While the inflation numbers are taking longer to cooperate, the bank expects the RBA will also take the view the trend is down in coming months.
With this in mind the bank now sees only a 25% chance of further increases in rates this year, down from 30-40% previously. The unevenness still evident in the economy supports such a view, the bank noting the difference in conditions in various states and industries is likely to give the RBA reason to pause, so it can more accurately assess the state of the economy before deciding whether to act on rates again.