Australia | Dec 12 2006
By Chris Shaw
Much of the recent data regarding the Australian economy has shown signs of weakness, but the November monthly Business Survey by National Australia Bank suggests business conditions are still reasonably strong and may have actually improved in the past two months.
The bank notes while business conditions for the month actually fell four points to a reading of +14 this was still a high enough outcome to maintain the recent upward trend in figures. While the trading and profitability readings both fell slightly they remain near their highs, the transportation, construction and retail/wholesale sectors recording the best results in the period.
This strength helped reverse what had been a trend decline in new orders, though this has not been enough to boost overall business confidence. The confidence reading was unchanged for the month at what are reasonably low levels. This, the bank suggests, reflects the view of industry recent strong trading is likely to prove to be only temporary as more restrictive monetary policy continues to impact and domestic demand slows.
The survey recorded a fall in capacity utilisation of 1.1% to 82.4%, the bank suggesting while this was not enough to reverse the rise in October it does point to signs the strengthening trend of recent years is coming to an end. This is also reflected by the employment data, which the bank notes fell six points to a reading of +2.
In terms of where the improvements are occurring, the bank notes the last couple of months have seen New South Wales and Victoria record the strongest gains. While there is no obvious reason as to why this is occurring the bank suggests it could be a wealth effect from recently stronger equity markets.
Worryingly for inflation the bank notes wages rose 1.4% on a seasonally adjusted quarterly rate, which is the highest rate of increase since the middle of the year and the second month in a row where wages have risen.
This is not consistent across all sectors though, as the bank points out the communications and mining sectors continue to enjoy the highest rate of wage growth while the retail, utilities and agribusiness sectors are lagging. While the fall in capacity utilisation may offset this to some extent, the bank expects the Reserve Bank of Australia (RBA) to closely watch wage outcomes in coming months.
Good news for companies comes from the second consecutive monthly easing in purchase cost pressures, as the quarterly increase of 0.6% is the smallest since February and reflects recent weakness in oil prices. Not so good news though is the fact wholesale purchase costs are up 5.3% against a 3% increase in retail costs, which the bank notes points to upward pressure on inflation.
Factoring in the latest numbers has seen the bank cut its growth forecast for the Australian economy in 2006/07 by 0.25% to 2.0% and in 2007 by the same amount to 2.25%, which accounts for the impact of the drought and the latest increase in interest rates by the RBA.
A fall in farm output of 25% is expected in 2006/07, which in GDP terms accounts for a full 1.0% taken off the growth forecast. Similarly domestic demand is expected to fall, touching 2.0% by the middle of next year and 2.25% in 2008, down from 3.4% in September.
With the slower growth outlook the bank expects unemployment to begin to creep higher, reaching 5.25% by mid to late next year. At the same time it expects core inflation to trend upwards to as much as 3.25% by the end of this year before falling back below 3.0% by the middle of 2007.
The bank’s view is the RBA is now waiting to see what the data over the next couple of months indicates before moving again on interest rates, suggesting there is currently only a 30% chance of a further increase in rates in February next year.