Australia | Dec 11 2007
By Greg Peel
The main theme to come out of National Australia Bank’s monthly business survey from November is that conditions continue to be strong, but are beginning to ease. Confidence is starting to erode.
Overall, the business condition meter fell 5 points to +15 in what the bank describes as a broadly based pull back from record levels last month. More specifically, trading conditions registered a 7 point fall to +21, profitability was down 8 points to +14, while employment conditions scored a 2 point rise to +12.
Capacity utilisation – arguably one of the RBA’s most referred to reasons for economic strength and inflation danger – fell 1.4 percentage points to 83.7%. However, this is only a mild adjustment on October’s very strong number and overall capacity is still rising at a record rate. New orders were unchanged at a “robust” +7.
NAB believes the result is consistent with the measure of domestic demand growing at around 4% in the early part of the December quarter. However, the numbers also suggest both demand and business conditions may have peaked.
With credit concerns and general financial turmoil still a pervading backdrop, business confidence was down 3 points to +6 in the month. NAB notes the current drivers of weaker confidence are interest sensitive sectors and, from November in particular, concerns in the finance and business services sectors. The bank also considers that uncertainty surrounding a change of government had some influence.
Wage growth moderated a touch in November says NAB, which may prick the RBA’s interest. However, the annual rate of growth is unchanged at a high 5.4%. There is also evidence of wider retail margins which are keeping price growth at 2.4% – also a high rate. There is not a lot in these particular numbers to suggest the RBA would turn dovish.
NAB has left its global growth forecast unchanged at 4.2% for 2008 but has now introduced a forecast for 2009 of 4.0%. The US will weaken, the bank suggests, but aggressive action from the Fed and a strong economy in China will offset.
NAB’s Australian GDP growth forecast for 2007 has now weakened to 3.8% while 2008 has been left at 3.75%. Core inflation expectations remain at 3.5% for early 2008 but this should fall to below 3% later in the year (consistent with RBA forecasts). NAB still sees the Aussie rising as high as US$0.96 and crimping inflation growth.
At this stage NAB still expects the RBA to lift rates by another 25 basis points in February. However, conviction is wavering somewhat as a lot depends on the potential for ongoing financial market turmoil and the rising cost of funds. NAB does expect, however, that late 2008/early 2009 will see the RBA move into an easing phase.