Australia | Jul 10 2007
By Greg Peel
Over in the US, market sentiment is presently polarised between the followers of Goldilocks – those who see moderate economic growth, moderate inflation and healthy earnings (just right) as the reason why the record 67 month bull run will extend – and her long term adversaries, the bears – those who see danger signals from a weak housing market and mortgage crisis contagion.
Here in the Land of Oz, the monthly National Australia Bank survey of business confidence has found what might be considered pretty much a Goldilocks scenario as well.
The overall confidence index remained unchanged from May to June at +15, meaning the trend is still up. “Trading conditions” were seen as positive, adding 1 point to +24, while “business conditions” were down a point, but still to a “robust” +16.
Profitability, however, fell 4 points to +13 while employment conditions were still seen as positive, up 1 point to +11.
NAB’s economists conclude that “the key message from the June survey results is that business continues to report robust levels of business activity and growing confidence. Indeed, the survey confirms that the acceleration in the momentum of growth, in late 2006 and early 2007, has continued into mid 2007.”
The headline numbers do hide, however, the disparities between specific sectors. Unsurprisingly, mining conditions have surged, led by signs of ongoing Chinese economic strength and no doubt aided by analysts falling about themselves to raise commodity price forecasts. While a higher Aussie dollar is not beneficial to many, its effects are outweighed by price movements. Western Australia is the most confident state.
And with the resource sector driving the stock market it’s also unsurprising that the finance & business services sector is also confident.
Not quite so obvious is that construction activity confidence has begun to weaken, despite promises of significant government infrastructure spending ahead. Could it be the industry is beginning to worry about interest rates and credit spreads? Not to mention high input costs. Residentially there are little signs of a housing turnaround yet in NSW, while booming WA is now facing affordability issues. Housing affordability has suddenly become the election issue du jour (other than regional terrorist activity which has remarkably picked up this last week).
NAB notes as “particularly surprising” the fall in confidence in the retail sector, where both confidence (-11) and conditions (-13) deteriorated markedly. The economists do not entertain a reason in their release, but one might consider that the prospect of rising petrol prices ahead, and an increasing focus on levels of mortgage and credit card debt accompanied by news of increased foreclosures and bankruptcies and the possibility of another rate rise might just put a dampener on any gains made from a higher Aussie.
NAB notes that the rising trend in confidence has not dragged with it significantly higher wage and price outcomes. These have remained “well behaved”, just as Goldilocks would want. But while the trend in wages growth over the last six months has been slower than the previous six months, the annual running rate is still 5.2%. Given the high level of capacity utilisation, and continuing acceleration at present of the non-farm economy, the RBA must be keeping a wary eye out for wage inflation.
And the wage growth figure would have been step-jumped down when the government introduced AWAs and many businesses adopted them.
The price inflation front still appears on a slowing trend, with NAB’s measure of annual retail inflation running at a comfortable 2.1%. The trend in retail prices suggests this might even fall further. The strong Aussie is helping. Nevertheless, NAB feels that while core inflation should edge down to around 2.4% in late 2007, rising purchase costs will affect a jump to 2.7% in 2008 (but this could be lower on a higher Aussie).
The economists see economic growth slowing domestically from 4.0% to 3.7% in 2008. Global growth is expected to slow to 4.5% with China and India alone contributing 2.5%.
So the million dollar question?
NAB sees rates on hold at least until late 2007, but with the risk to the upside. The economists give a 2007 hike a 40% chance, but have “little doubt” there will be higher inflation in 2008.