Australia | Apr 17 2007
By Rudi Filapek-Vandyck
National Australia Bank’s team of economists reports the bank’s latest quarterly business survey found that business conditions in Australia were unchanged at strong levels in the March quarter of this year.
In terms of the components of business conditions: both trading conditions and profits were down a fraction, but offset by a rise in job gains.
Across States, WA continues to experience significantly stronger business conditions, despite a deterioration in the quarter while NSW, Queensland and particularly SA recorded a deterioration in business conditions. Victoria gained ground.
Overall, the NAB survey shows business conditions remain solid, capacity utilisation is at a record high level and labour market conditions are tight. About 65% of businesses reported that labour availability was a significant and/or minor constraint on output in the March quarter.
NAB economists highlight wages have responded to these conditions, with stronger rises of late; however, the increases from the quarterly survey remain moderate by historical standards, they add.
Economy-wide prices rose by 0.5% in the March quarter to be 1.8% higher on an annual basis, compared to annual rises of 2.8% and 3.4% for purchase costs and wages, respectively. Sales margins were unchanged in the March quarter for retailers, but came off a touch across rest of the economy, according to the survey.
The economists report demand remains the main constraint on company’s profitability outlook, however, consistent with improved conditions, this concern is waning.
Businesses expect conditions to improve in the June quarter.
All in all, reports NAB, business conditions in Australia remained steady at 17 points, with both trading and profits down a point, but employment up 4 points.
The survey also showed forward orders strengthened by 4 points. This comes with strong medium term capex and activity expectations.
The economists believe the outcome of the survey is consistent with non-farm GDP growth of around 3.75% in the year to Q1 2008, and strengthening.
While capacity utilisation has moved to a record quarterly high, labour costs have run up but some slowing can be expected, according to NAB. The economists believe underlying and economy-wide price pressures are still moderate.
NAB’s economists have drawn the conclusion that global economic growth has peaked. It is the bank’s current forecast that the global economy will slow down from 5% growth in 2006 to around 4.50% in 2007, further to 4.25% 2008.
The US Fed is seen as likely to be cutting rates in the second half of calendar 2007. For Australia, the bank forecasts GDP forecasts growth of 2.9% in 2007 and 3.7% in 2008.
As (core) inflation is expected to have peaked already in Australia, the RBA is expected to remain on hold, but risks remain to the upside, the economists concede.
A US hard landing remains the key, medium term, downside risk, the bank believes.