Australia | Dec 09 2008
By Andrew Nelson
National Australia Bank’s monthly business survey and economic outlook for November 2008 provided little in the way of positive surprises and demonstrates once and for all that Australia seems to be heading towards recession. Falls in business confidence saw the read drop to a new record low as sales, profits and labour markets continue to deteriorate, while business conditions are at levels last seen in late 1992.
Business confidence edged down to an all-time low of minus 30 index points. This compares to minus 24 points in the December quarter of 1990. Based on historical relationships, NAB’s numbers indicate overall business conditions appear consistent with annual growth in non-farm GDP of below 1%. To quote the bank, “there has been little, if any, ‘real’ growth during the past six months to November”.
The results of the survey sees NAB’s group chief economist Alan Oster take the razor to a number of the bank’s key economic forecasts, including global GDP growth, domestic GDP growth, the AUD/USD exchange rate and domestic interest rates.
NAB’s global growth forecasts have been significantly reduced to only 1.7% for 2009, down from 2.4% previously. This takes into account the ever worsening economic numbers being reported globally in recent weeks as the last few months of financial turmoil finally manifest themselves on various national economies. For the US, growth forecasts have been lowered to a negative 1.25% in 2009 (a recession on all available metrics and methodologies), with similar numbers in Europe and the UK. In fact, these are the worst recession numbers since the end of World War Two.
In our region, NAB has lowered its Japanese growth outlook to minus 0.3% and non Japan Asia, excluding China, to only 1%. The bank expects the slowing global picture will ensure that both export growth and global trade weaken. The China picture isn’t as gloomy, with the bank forecasting growth of 7.5% in 2009 and around 7.75% in 2010, which is being backed by massive policy action.
Australian GDP forecasts have been cut to 0.5% from 1.25% for 2009 and to 1.75% from 2% for 2010. Oster says these levels reflect the deterioration in global prospects and an otherwise very poor outcome in H208, where the non-farm economy has clearly stalled. According to Oster, the new forecasts imply a moderate recession in the non-farm economy.
With inflation likely to be negative for the first time in a long while in Q408, the bank sees core inflation back into the RBA target range by late 2009. This gives the Reserve Bank free reign to do what it will with fiscal policy, which is likely to be attempting to avoid a very hard landing in 2009 and into 2010. Given the evidence from this latest survey of deteriorating confidence, declining forward orders, falling investment intentions and evidence of labour shedding and it’s no wonder that NAB sees the RBA continuing to cut aggressively to 3% by early 2009.
And this appears to be NAB’s best case scenario, as it still sees downside risks to both its GDP and rate forecasts.
Oster is not expecting an unscheduled RBA meeting in January, as it could well be seen as a panic reaction. However, he does expect a relatively quick adjustment path, with the most likely path being 75bp in February followed up by another 50bp in March 2009. However, the timing and size of cash rate cuts will depend on two key considerations; a confirmation that demand is indeed slowing and that inflation is on the way down; and the state of global and domestic credit markets.
More to follow…