Australia | Nov 13 2007
By Chris Shaw
In line with economic data indicating the Australian economy continues to grow strongly National Australia Bank’s Monthly Business Survey for October showed a return to record levels for both business conditions and capacity utilisation.
According to the bank’s chief economist Alan Oster the increase showed continued strength in private sector demand, while both trading conditions and profitability recorded strong outcomes for the month and are now at record levels for the ten year history of the survey.
Actual outcomes showed business conditions increasing by four points to a reading of 20, trading conditions up two points to 28, profitability four points higher at 22 and capacity utilisation up to a record 85.2%. Also strong was employment, which rose four points to a reading of 10.
One offsetting factor was subdued confidence levels, particularly in sectors sensitive to interest and exchange rates where there are growing concerns about the ability to sustain current momentum.
A slight up-tick in the trend for forward orders and the strong capacity utilisation figure suggests sustaining the economy’s momentum is unlikely to be a problem in the short-term at least as businesses are working hard, the data showing the strength is broad-based and spreads across most industries.
Oster suggests it may be a problem for the Reserve Bank of Australia (RBA) though as there are signs the tightness in capacity is flowing through into higher wages growth, particularly in sectors where until now the pressure for higher wages had been quite modest such as the retail, wholesale and manufacturing sectors.
The survey showed the annual rate of increase in wages accelerated to 5.4% from 5.1% in September, which is likely to be inflationary and so may force the RBA into further action on interest rates.
Overall Oster suggests the data indicate ongoing strength in activity with some scope for higher interest rates and a stronger Australian dollar to impact over the medium-term, especially in the retail, wholesale, manufacturing, construction and transport sectors.
Based on the survey data Oster estimates early December quarter private demand growth of around 4.5%, which when combined with expected public sector demand growth of around 5.0% suggests little downside risk in terms of Australia’s GDP. In fact, Oster suggests the risk is to the upside with respect to his current forecast for 2007 GDP of 4.3%.
Despite this he has not changed his forecasts, which call for growth to ease in 2008 to around 3.2% on the back of an easing in non-farm GDP growth from a forecast 5.0% increase in 2007 to 3.2% in 2008.
He continues to see core inflation rising to around 3.5% in the first half of next year and this is likely to see the RBA move once more on rates in the early part of 2008, though he suggests there is a 30% chance the RBA will bring forward the move and lift rates again in December.
There is no change to the bank’s global growth forecasts, which call for GDP to increase by 4.8% this year and 4.2% in 2008. With a recession possible in the US the bank sees the Fed cutting interest rates to around 4.0%, which will weaken the US dollar and so reduce US demand.
This will flow through into reduced growth in the European Union, while growth in China is forecast to remain strong at 10.3% in 2008 following growth of circa 11.5% this year.
It should also flow through into a stronger Australian dollar, with Oster forecasting the exchange rate moving to around US96c by the middle of next year before falling to around US82c by the end of 2009.