Australia | Dec 09 2008
(This story should be read in conjunction with part 1 published earlier today).
What is particularly concerning about NAB’s monthly business survey, notes the bank’s chief economist Alan Oster is the speed of the deterioration in recent months. After business confidence dropped last month, one couldn’t be blamed for hoping that recent aggressive fiscal and monetary policy announcements would have sparked an improvement.
Clearly, this has not happened, nor does it look like the deterioration has bottomed. All components of the business conditions index fell significantly for the second month in a row. Trading was down 5 points to minus 15 index points and profits down 5 points to minus 18 index points. More significantly, says Oster, is the very sharp slowing in employment, with the index down 7 points to minus 17 index points. Again, these readings are the lowest since late 1992.
The further significant deterioration in orders, down 5 points, brings the aggregate forward order index to minus 25, a level that has not been seen since late 1991. By industry, forward orders have now fallen to recessionary levels in both manufacturing and retail, says Oster. This, of course, will do little to help business confidence and will likely add pressure to future employment and business investment plans.
All this highlights that a combination of falling sales, profits and confidence has significantly affected employers hiring and firing behaviour. Indications are much more bearish than what has so far been reported in previous employment estimates.
NAB expects much of the slowdown in activity will be concentrated in the consumer and related sectors, but this will, of course, have a flow-on effect for non-mining investment spending. Domestic demand is expected to slow to near zero in mid 2009 and real consumption growth to essentially stall. As domestic demand and real consumption decline, lower business investment in mid to late 2009 will eventuate.
Such an outcome would see the growth in employment turn negative in mid to late 2009 and would as a consequence see official unemployment numbers continue to rise. Oster expects that by late 2009, unemployment will reach 6% and by late 2010 it will be approaching 6.75%.
Lastly, the bank says its commodity, activity and interest rate movements are consistent with the USD/AUD moving lower. Current levels are seen as an overshoot, but given the uncertainty of global markets, the bank suspects this overshooting will continue for some time. Oster expects the cross to stay below 70c until at least mid 2009 before fundamentals reassert themselves. Once markets are on more sound footing, the Aussie is expected to be back to around 75c by late 2009 and somewhat higher again in 2010.
Putting all of this together, Oster notes that business conditions in November clearly indicate that growth in domestic demand and non farm GDP are declining and there is no near term brake to slow the decline. He thinks the survey clearly points to even worse results in December, which means that if we are to avoid a negative GDP reading and recession, much will depend on consumers spending the government’s fiscal package.
