Australia | Sep 09 2008
By Chris Shaw
A minor uptick in both business conditions and confidence last month indicates conditions may be stabilising after recent falls, but National Australia Bank group chief economist Alan Oster suggests the key message from the bank’s August Business survey is there has been little real improvement in fundamental business conditions.
In seasonally adjusted terms the Business Conditions Index rose two points to a -3 reading and the Business Confidence Index also increased by two points to a -7 reading. The former is well down from recent highs of 7 in May and a peak of 20 in October of last year.
As Oster points out, the figures mean around 23% of firms are experiencing very tough conditions against 55% seeing conditions as ok and only 20% viewing them as very good. This is reflected in the fact only the mining sector actually recorded stronger conditions in the month, the other sectors of the economy all posted further falls, with the most significant coming from the finance, property and business services, wholesaling and transport sectors.
The slight improvement in confidence levels was also very narrowly based, as it was only the retail sector registering an improvement on the month, buy only because of significant falls in recent months. Given the changes were only minor, Oster notes it was not surprising capacity utilisation levels remain broadly unchanged at 81.6%, which is close to their lowest level over the past three years. Forward orders declined by a further two points to a reading of -8, which is the lowest level since 2001.
With annual wages growth unchanged in August at 5.4%, Oster has not changed his inflation forecasts, which call for inflation to increase to around 4.5% in the shorter-term and to not return to the Reserve Bank of Australia’s (RBA) target range of 2-3% until mid or late in 2009.
The risk to inflation, in his view, is currently to the upside thanks to recent falls in the Australian dollar, but with the RBA expected to focus on avoiding a hard landing for the economy as a whole, Oster expects further interest rate cuts, with another 25 basis point cut by the end of this year and a total of 100 basis points in cuts over the next year. This would bring the cash rate back to 6.0%.
Following last week’s lower than expected GDP numbers for the second quarter, Oster has lowered his growth forecast for the Australian economy this year to 2.5%, before a further fall to 2.25% in 2009. This implies weak growth for the broader economy, as on his numbers, Oster estimates GDP growth ex the mining and farm sectors will only be around 1.0% next year, with risk to the downside if global growth weakens further.
In global terms Oster continues to forecast GDP of 3.4% this year, though the composition has changed slightly, with the US now contributing more than previously expected and Europe, the UK and Japan expected to deliver slightly weaker numbers.
Global growth is forecast to fall to 2.7% in 2009, as while China should slow only modestly, continued high oil prices, negative wealth effects from lower equity and house prices and ongoing credit market difficulties will keep economies under pressure.
These pressures will remain in evidence into 2010, as in that year Oster predicts only a slight improvement in global growth to just below 3.0%. The major risk to these forecasts is from the US, as there remains scope for that economy to endure a hard landing and so push down the global growth outlook even further.