Australia | Nov 14 2006
By Chris Shaw
The latest National Australia Bank Monthly Business Survey has revealed some better news with respect to overall business conditions, though confidence levels remain somewhat subdued.
The bank notes the October survey recorded a four point lift in Business Conditions to a reading of +18 points, with the trend now to the upside. Of interest, the bank notes the improved outcome appears to be the result of improved conditions in the wholesale and retail sectors, while the strongest gains have come from in the New South Wales and Victorian markets. This contrasts to the Queensland market, where confidence levels have continued the decline that began around the middle of the year.
The better outcome has been reflected in stronger capacity utilisation figures, the October reading of 83.5 points up 1.7 points from September and again close to record levels.
While the survey results suggest actual outcomes are improving the bank notes the outlook in terms of business confidence and new orders is still tough, both readings unable to show any significant gains in October with confidence unchanged at a +6 reading and forward orders up one point to +2. Employment also improved, with the survey showing a two point gain to +8.
The bank suggests this reflects the view of business that recent strong trading will be only temporary in nature, as the impact of the drought and higher interest rates flows through and the economy faces pressures from a slowing in global growth.
Temporary or not, the stronger employment outcome has flowed through into slightly higher wages, up 1.3% seasonally adjusted for the past three months compared to 1.2% in September. The bank notes though the annual rate remains at 4.75%, where it has been since April.
Again this has been very much a sector by sector scenario, as construction, telecommunications and mining reporting stronger than average gains and utilities and retail coming in below average.
This is adding to the pressure on companies, as the bank notes overall costs are continuing to increase. While the reading in October was a gain of 1.1% on a quarterly basis compared to 1.4% in September, the annual increase is unchanged at 4.4%. The bank considers this outcome to be a threat to inflation going forward, so it sees the Reserve Bank of Australia (RBA) keeping a close watch on such figures.
Despite the stronger than expected business conditions outcome the bank has not changed its forecasts for the economy as a whole, as it continues to forecast growth of 2.25% in 2006/07 and 2.5% for 2007. This is despite its outlook for domestic demand, where it sees a further slowing to around 2% by the middle of next year, before a recovery to 2.25% by the end of 2007.
This is expected to produce a slowing in employment growth, meaning a higher unemployment rate is likely in coming months. The bank is forecasting a rate of 5.25% by mid to late next year.
It continues to see inflation reaching 3.25% by Christmas, though the recent increase in interest rates is expected to bring the core rate back within the 3% target by the middle of 2007. Headline inflation is expected to look even better, the bank expecting it will be below the bottom of the RBA’s 2-3% target rate by June next year.
As a result the bank expects the RBA will be on hold in terms of interest rates for several months as it continues to assess data, a process it expects will take some time. It expects interest rates in Australia to be unchanged through 2007.
The bank’s outlook for the global economy is for growth of around 4% next year, though it remains concerned the US may slow to a greater extent than currently forecast. Its forecast calls for US growth to fall to between 2-2.25% in 2007, this despite anticipated cuts in official interest rates and a flat oil price outlook next year.