Australia | Nov 09 2010
By Chris Shaw
The early signs of recovery evident in the National Australia Bank Monthly Business Survey in September have been put on hold as the October survey showed business conditions have dropped significantly.
Business conditions fell to a reading of plus 2 in October, down from plus 7 in September and plus 5 in August. Business confidence also declined by two points in October to a reading of 8, which is close to the long-term average of a plus 7 reading.
In trend terms, confidence improved in the construction and retail sectors but fell sharply in the wholesale sector. Trend confidence remains strongest in the transport and utilities, wholesale, mining and finance, business, property and manufacturing sectors.
Both trading and profitability declined in October, the former to a reading of plus 4 from a reading of plus 13 in September. Profitability came in at a minus 4 reading for October against a reading of plus 6 in September, the result the first negative outcome for this measure for more than two years.
NAB chief economist Alan Oster notes conditions in the construction sector fell sharpy into negative territory in October, while retail conditions remain at very depressed levels. The mining, transport and utilities, and personal services sectors continue to exhibit strength, while employment also strengthened.
Forward orders declined to a minus 3 reading from a plus 3 reading previously, the fourth negative reading for this measure in the past six months. Capacity utilisation also trended down to 81.1% from 81.6% in September, though Oster notes stocks were higher at a plus 7 reading against plus 3 in September.
In regional terms, Oster notes business conditions were strongest in Western Australia, followed by Victoria and South Australia. Conditions worsened in both Queensland and New South Wales, both states recording negative readings for the month.
According to Oster, the survey results are consistent with Australian domestic demand running at an annual rate of around 3.25% in the September quarter and around 3.0% in the December quarter. This implies annualised growth in non-farm GDP of about 2.5%.
Post the survey, Oster has left his forecasts for Australian economic growth unchanged at 3.2% in 2010 and 3.7% in 2011. With the domestic sector expected to continue to struggle, Oster anticipates stronger growth will be supported by mining investment and export income.
With respect to interest rates, Oster expects the Reserve Bank of Australia (RBA) will resume rate rises in early 2011, with the cash rate expected to peak at 5.25% by the middle of 2011. This is down from his previous forecast of a peak in rates of 5.5%.
The change reflects ongoing weakness in some interest rate sensitive sectors of the economy, as well as the banking sector helping the RBA by lifting lending rates by more than the increase in the cash rate. Oster expects a stronger Australian dollar will help keep inflation under control, so he has cut his core inflation forecasts to 2.6% by the end of this year and 2.5% by the end of 2011 to reflect this view.
Given indicators remain solid at present, Oster expects Australian employment will continue to grow at around 3.25% through the remainder of this year before easing to around 2.5% in 2011. Unemployment could fall below 5.0% by the end of this year on the way to stabilising at around 4.5% over the medium-term, predicts Oster.
In terms of global growth forecasts, Oster still expects GDP growth of 4.6% this year and 4.4% in 2011, though the composition of this growth has changed slightly. Both US and Japanese growth forecasts have been lowered slightly, the changes being offset by good UK economic performance in the September quarter and a modest increase in forecasts for India.
Given expectations of continued weakness in the US dollar, Oster has lifted his forecasts for the AUD/USD currency pair, now expecting an Australian dollar peak of 1.05 in the middle of next year. Longer-term, Oster continues to expect the Australian dollar will fall back from parity against the US dollar as commodity prices level out and as overseas bond yields start to recover.
