Australia | Apr 08 2008
By Greg Peel
The National Australia Bank business survey for March showed a 4 point reduction to +7 points. This is the lowest reading since December 2002. The index has now fallen 10 points in three months which is one of the sharpest falls in the survey’s history. All sector readings fell.
No industry was spared a gloomy outlook. While it may come as no surprise that retail fell heavily in confidence and conditions, or that wholesale, finance and personal & recreational were weak, it may be surprising to note that mining also reversed its recent strength, and that construction fell significantly. The numbers are consistent with domestic demand growth having fallen to around 3.00-3.25% from its level of 5.50% late last year, notes NAB.
“The size of the slowing has caught both business, and us, by surprise,” offered the surveyors.
Capacity utilisation remains high at 83.3%, down from 84.1%. Wages growth is steady thankfully, unchanged at 5.1% year-to-date, but retail prices continue to accelerate – up to 2.8% annual growth – while purchase costs have accelerated further – up to 3.9% annual growth.
In other words, Australia is currently facing stagflation. However, NAB’s economists have left their GDP growth forecast at 2.75% for both FY08 and FY09, expecting the weakening economy to be offset by higher terms of trade, tax cuts, and better times for farmers. Inflation is forecast to peak at 3.75% in March (we don’t yet know the first quarter CPI numbers) and then begin falling back to within the RBA’s 2-3% comfort zone by early 2009. On that basis, NAB is expecting the RBA will begin cutting rates in early 2009. Previously it was tipping mid 2009.
The economists have lowered their global economic forecast to 3.5% GDP growth in 2008, down from 3.8%. 2009 is unchanged at 3.7%. The US will see a moderate recession, resulting in 1.75% growth in 2008 and 2.75% in 2009. China is forecast to slow to 9.5% growth in 2008 (it has been running at over 12% last year).
With such a bad survey result coming hot on the heels of some previous weak data, the question is once again raised as to whether the RBA has gone too far and inflicted irreparable damage. Economists are mostly still expecting one last hike next month – to 7.5% – following what are bound to be scary CPI numbers for the first quarter. NAB is not among the seven-and-a-halfers, suggesting the central bank is in “wait and see mode”. The NAB survey is not officially a source of RBA wisdom, but it will not be ignored nevertheless. It is the RBA’s plan to reduce domestic demand, and it appears to be working.
If the RBA is prepared for a bad CPI number, might it just now decide 7.5% might be one step too many? Central banks have a history of overreacting. And in the meantime, the weak US employment number of last week is enough for the market to expect another Fed cut on April 30 of at least 25bps to 2%, but probably 50bps to 1.75%. The US-Aussie rate spread doesn’t get much wider than that in relative terms.