Australia | Oct 10 2006
By Chris Shaw
National Australia Bank’s latest Monthly Business Survey continues to provide evidence the recent interest rate increases are impacting on the Australian economy, as while business confidence and orders steadied in September they have not reversed the downward trend of the past few months.
But as the bank notes this is a positive in that it makes a further increase in interest rates in 2006 less likely, its estimate being there is now only around a 25% chance of a further rise this year as it expects the Reserve Bank of Australia (RBA) will look past the fact inflation is currently higher than its target range.
The major points to come out of the survey are business confidence appears to have stabilised as the reading for September was unchanged at +6, though the bank points out this follows significant falls in recent months from a peak of well above +10 earlier this year.
Business conditions improved slightly with the reading coming in four points higher at +14, though this is in line with the trend of previous months and also remains well down from a peak of near +20 prior to the May increase in interest rates.
The biggest surprise in the bank’s view was the strength in trading conditions, which rose eight points to +26. This comes despite capacity utilisation falling 1.3% to 81.8%, which is its lowest reading since April 2005. The bank’s explanation for such an outcome is the sharp increase in stock levels, which rose 7 points to +10, has led to some discounting at the same time as forward orders have flattened out.
On the plus side the bank notes the lower capacity utilisation figure is a positive in that it reduces wage pressure, so limiting the potential for a further increases in interest rates this year even though wages in September recorded an increase.
Again this view is supported by the ongoing divisions in terms of performance, as Queensland and Western Australia continue to lead the way in terms of business conditions while the other states lag. This too is changing a little though, as the bank notes the leading states are no longer pulling away from the other states in terms of performance.
It is a similar outcome in the various economic sectors, as there has been no change to the leadership positions of the mining and services sectors, with the cyclical sectors continuing to record slightly weaker performance.
Factoring in the latest figures has not changed the bank’s estimates in terms of economic growth for Australia, as it continues to forecast GDP of 2.5% in FY06/07 and of 3.0% in calendar 2007 before increasing to 3.25% in 2008. Domestic demand is expected to follow a similar path, slowing from around 3.5% in June this year to 2.5% in June next year, before accelerating to 3.5% in 2008.
Such an outcome would suggest the peak has passed for employment, the bank expecting employment growth to slow to around 1.25-1.75% by mid next year, with a corresponding drift up in unemployment to around 5.25% by the middle or end of 2007.
The bank continues to forecast inflation returning to within the RBA’s target band by the middle of next year in terms of headline numbers, with core inflation returning to within the band sometime in 2008.