Australia | Mar 11 2008
By Chris Shaw
Last month National Australia Bank group chief economist Alan Oster suggested demand in the Australian economy had peaked in late 2007 and the bank’s Monthly Business Survey & Economic Outlook report for February confirms this as while it showed a slight improvement in business confidence it was not enough to recover the large falls in January.
The report showed a two point fall in business conditions to a reading of +11, which is down nine points from the peak in October last year. While the number suggests conditions are still reasonable it also in Oster’s view reflects a slowing in demand, which is now growing at a pace of around 4% annually compared to 5.5% late last year.
Other measures in the survey also suggest conditions have peaked as while business confidence rose two points it is still at only a -2 reading and a number of sectors, including manufacturing, construction and finance, posted declines in the period. As well, the report shows a number of businesses expect conditions to ease further in coming months.
Across the country the data show a general easing of conditions with conditions in South Australia weakening the most, though Oster notes the mining industry continues to enjoy strong conditions and the Western Australian and Victorian economies are proving most resilient.
Profitability fell five points to a reading of +8, trading conditions were down two points at +17 and a slowing was also apparent in new orders as that measure was down one point to +3, though on the plus side the bank notes capacity utilisation was unchanged at 84.1% and employment rose two points to +9.
Given the focus on the inflation outlook in Australia the news here was mixed as while wage demands were relatively steady for the month retail prices were slightly higher, though in annual terms they were unchanged at 2.7%. The bank has not changed its forecast of inflation peaking at 3.75% in the June quarter, though it doesn’t expect a return to the Reserve Bank of Australia’s (RBA) target range until early in 2009, which is earlier than the RBA forecast of early in 2010.
Oster suggests the RBA is now in wait and see mode in terms of monetary policy as recent increases in rates need time to filter through to the economy and he expects the next move will be down, with significant cuts likely through the course of 2009.
The recent tightening in policy combined with lower equity market wealth levels sees the bank lower its GDP growth forecast for 2008 to 2.8% from 3.0% previously, while it expects a similar outcome in 2009. Reflecting the slowing in conditions the financial year growth forecasts are somewhat different, the bank forecasting GDP growth in FY08 of 3.75% and in FY09 of 2.75%. Helping prevent any hard landing for the Australian economy will be an improving terms of trade and the boost provided by cuts to personal income taxes.
Globally the bank has not adjusted its outlook, with its forecast for the US calling for growth of just 1.25% this year even as the US Federal Reserve cuts interest rates to 2.0%. Weaker conditions are also expected in other major economies such as Japan, the EU and the UK, though growth is China is expected to remain firm at around 10%.Overall the bank is forecasting global growth of 3.8% this year and 4.0% in 2009.