Australia | Feb 05 2008
By Chris Shaw
There was no significant decline in Australian business conditions in the closing quarter of 2007 according to National Australia Bank’s latest quarterly survey, which found while growth momentum appears to be past its peak overall conditions remain quite strong.
The Business Conditions reading rose one point to +19 on the back of modest gains in both profits and employment and a four point increase in trading conditions. Also helping was a 1% increase in capacity utilisation to a record of 84.2%, while the bank notes almost 70% of participants reported difficulties in finding suitable labour, indicative of strong employment conditions.
The survey also suggests private demand also strengthened over the past year, this at the same time as confidence continues to decline to what is now a below average reading of +6, having fallen three points in the quarter.
While near and medium-term expectations remain solid they both fell slightly in the period, as did new orders, though longer-term capital expectations are unchanged. On the plus side the bank notes labour costs were relatively stable, though this is offset by increasing retail price pressures.
Group chief economist Alan Oster suggests the quarterly report confirms the findings of the recent monthly reports in that business activity remains strong while there are signs domestic demand is gradually slowing as confidence falls.
In sector terms conditions continue to strengthen in interest sensitive areas of the economy such as retail, wholesaling, manufacturing and construction, while finance and business services appear to be turning down. Recreation and personal services recorded noticeably weaker results in the quarter.
Queensland enjoyed slightly stronger conditions, but as Oster points out conditions elsewhere in Australia were relatively flat to down slightly. While wage pressure is not accelerating it remains elevated, Oster suggesting this leaves little room for error given wage inflation pressures should remain strong for some time.
The results mean some changes to Oster’s economic forecasts, as he is now predicting GDP growth for Australia of 3.0% in 2008 against a previous forecast of a 3.2% increase. His estimate for 2009 is unchanged at 3.0%.
Higher interest rates should see the pace of domestic demand come down from a current rate of just over 5.0% to around 3.5% in 2008 and 3.0% in 2009, with unemployment to hover around 4.5% through this year. Inflation should remain above the Reserve Bank of Australia’s target range for some time.
In terms of global growth Oster continues to see downside risk to the US economy, especially in the first half of the year. The Federal Reserve is clearly focused on addressing the slowdown and Oster sees a further 0.5% in interest rate cuts by April, which should see growth recover slightly in the second half. For the year he is forecasting GDP growth for the US of 1.25%, with expectations the UK, Europe and Japan will also slow given the US outlook.
Offsetting this is continued strength in China and India, leading Oster to forecast global growth of 3.8%, which would be down from the 4.4% achieved in 2007. A modest recovery is tipped for 2009, Oster forecasting 4.0% global GDP growth next year.