Australia | Feb 10 2009
By Chris Shaw
Having bounced in December, Australia’s business confidence and business condition levels returned to their weakening trends of recent months according to the National Australia Bank Monthly Business Survey and Economic Outlook for January. The former hit record lows and the latter reversed half of its gains from the previous month.
The survey notes business confidence fell 12 points to a low of minus 32, while business conditions declined five points to a reading of minus 11. this brings it back to the levels recorded last October and undoes much of the boost resulting from the Federal Government’s first stimulus package.
As the bank’s chief economist Alan Oster points out, the outlook for the economy remains grim, as forward orders and employment are around recessionary levels at the same time as capital spending and capacity utilisation are continuing to fall. The former was down to minus 21 index points for the month and the latter declined by 0.4 points to a reading of 80.3.
The falls were broadly based through the economy, with confidence in the retailing and wholesaling sectors hitting record lows and the outlook in the manufacturing, transport and construction sectors also weakening rapidly. While forward orders rose slightly for the month, their minus 20 index point reading remains around lows not seen since December of 1991. The trend is unlikely to improve given exports have also fallen sharply in recent months.
The other worry, in Oster’s view, is the significant weakness in conditions and confidence in the wholesale sector, as this is a leading indicator for retail activity. As such, its decline paints a relatively bleak picture for the outlook for that sector in coming months.
Oster notes labour costs actually fell slightly in January, while retail prices rose slightly on the back of higher purchase costs. He also notes little change in terms of credit availability, with a significant number of respondents suggesting they had no need for new credit at present. This leads him to suggest it is weak demand rather than a lack of availability that is driving the current slowing in credit growth.
As well, he notes businesses are cutting back on their investment intentions at a faster than previously expected rate and this should flow through into further weakness in credit demand. Weaker trading conditions also imply further significant falls in capacity utilisation rates in coming months.
On the back of the numbers, Oster makes no change to his economic growth forecasts for Australia. He continues to expect a recession this year and negative GDP growth of 1.25% for 2009 as a whole. Given any recovery is not expected to emerge before late this year, he sees growth coming in at a very modest 1.0% in 2010.
Further fiscal stimulus by the Government should mean a budget deficit of around $50 billion in FY10, but in Oster’s view, this won’t be able to prevent unemployment rising to 7% by late in 2010. The good news is inflation should be back within the Reserve Bank of Australia’s (RBA) target band by the second half of this year.
Given the weak growth outlook, Oster anticipates the RBA cutting interest rates by 0.75% at its next meeting before pausing for a short time, with further deterioration in conditions to prompt a further 0.5% in cuts later this year . This will bring the official cash rate down to 2.0% by around the middle of 2009.
In terms of the global outlook, Oster’s forecast of GDP growth of 0.5% in 2009 is unchanged, as the lagged impact of wealth destruction, increasing unemployment, falling commodity prices and falling business and consumer confidence means the world economy won’t bottom out before late this year at best.
With a modest recovery then expected, Oster forecasts global GDP growth to increase to 2.5% in 2010.