Australia | Jun 12 2007
By Chris Shaw
Recent Australian economic data have been very strong so it is little surprise the National Australia Bank Monthly Business Survey for May has also shown strong results, with business confidence levels edging higher.
Group chief economist Alan Oster notes confidence increased two points to a +15 reading and the trend remains to the upside, while overall business conditions posted a one point increase to a +17 reading.
Employment also rose one point to a +10 reading, again not a surprise given recent record low unemployment levels, while profitability was unchanged at +17 and trading conditions fell one point to +23.
Oster suggests the key takeaway from the data is the overall level of business activity and confidence levels continue to grow and the recent acceleration in the economy’s momentum is continuing and may in fact strengthen further in coming months.
Driving improved confidence levels in May were better conditions in the retail and wholesale sectors, both of which have received a boost from the combination of strong equity and labour markets and the resulting boost these have given to consumption levels. Helping also has been ongoing strength in profitability and capacity utilisation, which for the month fell just 0.1% to 83.2%.
Breaking down the results shows the mining sector continues to be strong though it has weakened a touch of late, while the business and financial services sector has strengthened to a level similar to that of mining.
Retail also gained significantly in the past couple of months and wholesale rose to a lesser degree, while the manufacturing and transport sectors have flattened a little in recent surveys. One loser has been recreation and personal services, which includes a tourism sector being hurt by strength in the local currency.
On the plus side for the economy as a whole Oster notes the improved business conditions have been broadly based and not state specific, though Victoria has strengthened a little in recent months while New South Wales and South Australia have fallen slightly.
Oster suggests one feature of the results is the stronger conditions have not flowed through into deteriorating wage and price outcomes, which leads him to suggest the supply side of the economy has improved of late.
This doesn’t mean wage pressures have disappeared, Oster pointing out they remain firmly to the upside given capacity utilisation is still high and the non-farm economy is recording stronger results.
Factoring in all the recent economic data has seen Oster lift his forecast for Australian growth this year to 4% from 3% previously, though there is no change to his estimate of 3.75% in 2008. His core inflation forecast for this year has not changed and stands at 2.4% but in 2008 he has lifted his forecast to 2.7% from 2.4% previously.
This leads him to suggest there is now a 40% chance of a further hike in official interest rates sometime this year, with a late rise considered the most likely. This should support the currency at around current levels, though forecast lower commodity prices next year should see the currency trade down to around US79c by the end of 2008.
Despite the small adjustments domestically there is no change to the bank’s global growth forecasts, which stand at around 4.5% both this year and in 2008. While forecasts for US growth have been lowered to just 1.75% for 2007 and 2.3% for 2008 this is offset by strength elsewhere, as China, Europe and the UK are currently recording stronger than expected growth outcomes.