Australia | Jan 29 2008
By Chris Shaw
National Australia Bank’s Monthly Business Review for December shows business conditions ended the year at very strong levels, though there are signs the peak has passed as both sales and capacity utilisation are easing from recent peaks.
Group chief economist Alan Oster also points out the latest survey shows even though business conditions remain strong consumer confidence is falling and is likely to have declined further in January given the recent volatility in global financial markets.
The key findings from the survey were a two point increase in business conditions to a reading of +17 on the back of better conditions in the mining and wholesaling sectors, while trading conditions were unchanged at +21, profitability was up five points to +19 and employment fell two points to +10.
But adding to evidence the economy has now peaked in Oster’s view is the fact capacity utilisation fell 0.7% to 83% for the month and new orders were down two points to a +5 reading, while at the same time confidence has fallen back to long-term trend levels with a one point fall to +5.
The data leads Oster to suggest domestic demand grew at around 4% in the early part of the December quarter but has since eased slightly, while on the plus side there is evidence of a slowing in wage growth demands as the annual rate of increase has slipped slightly to 5.2%.
Factoring this into the broader picture Oster has lowered his forecast for Australian GDP growth in 2008 to 3.0% from 3.2% previously, a move that takes into account a reduced wealth effect from the recent falls in global equity markets as well as a higher cost of capital and tighter fiscal policy. The GDP forecast for 2009 remain unchanged at 3.0%.
Inflation remains under pressure and Oster now sees a peak of 3.75% in June, with no return to the Reserve Bank of Australia’s target range until early in 2009 as while wage pressures have settle price pressures remain. This is later than he had previously expected and he expects will result in a further 0.25% rate hike in coming months, with March seen as most likely.
While many comments of late have suggested the US was actually in recession at the end of last year Oster disagrees and estimates the US economy grew by around 1% in the December quarter, but he points out there remains a lot of bad news to come from the negative wealth effect of falling house and equity prices, higher oil prices and falling consumer confidence.
At the same time the fiscal stimulus package proposed by President Bush may not prove to be enough, so he expects the US Federal Reserve to continue easing interest rates in coming months.
On Oster’s forecasts the official interest rate in the US will come down to 2.5% by the middle of the year but this won’t be enough to prevent a stalling of growth in the first half before a gradual recovery in the second half, with annual growth for 2008 to be in the range of 1.25-1.5%.
Europe and the UK also appear likely to find the going tougher this year given forward indicators are suggesting a weaker outlook, with EU growth now forecast at around 2% in 2008 and even less in 2009.
China will remain a support for the global economy growth of around 10% still predicted for 2008, while India will also help by delivering forecast growth of around 7.5% this year. Overall Oster now expects global GDP growth of 3.8% this year and 4.0% in 2009, down from 2007’s 4.4%.