Australia | Jun 09 2009
By Chris Shaw
Reflecting the fact the Australian economy is currently struggling but also generating some early signs of improvement emerging, the National Australia Bank Monthly Business Survey and Economic Outlook for May showed an improvement in business confidence but a further weakening in business conditions.
The bank’s chief economist, Alan Oster, notes confidence rose 12 points in the month to a minus 2 reading and while the gains were broadly based the construction, manufacturing and wholesale sectors recorded notable improvements. In contrast, business conditions declined from a minus 10 reading in April to minus 14 in May, though this remains above the average for the past three months of minus 16.
While business profitability was steady at minus 9, the results weren’t so good in both trading conditions and employment, the former falling four points to a minus 7 reading and the latter declining from minus 18 in April to a reading of minus 25 for May.
Oster notes the trading outlook still looks relatively weak given forward orders in May fell three points to minus 14 and as capacity utilisation is now near its cyclical low at 79.2% currently. On the plus side, capital spending was relatively steady, though exports declined again to a reading of minus 27.
While labour costs fell slightly in March, Oster points out this was largely offset by a slight increase in the difficulty in accessing credit, with 22% of respondents in the survey suggesting credit was harder to find in May against only 15% reporting such a trend in April.
Factoring in the results and adding in the base effects from Australia’s national accounts from March sees Oster revise his GDP growth forecast for the Australian economy in 2009 to minus 0.5%, up from minus 1.0% previously. There is no change to his forecast of 1.0% GDP growth in 2010 given expected weak export markets and little growth in domestic consumption.
While business investment should fall sharply in coming months, strong government spending will act as an offset but this won’t be enough in Oster’s view to prevent unemployment hitting 6.75% by the end of the year and 8.0% by late in 2010.
Oster continues to take the view the Reserve Bank of Australia has largely finished in its rate cutting cycle, although his most likely outcome is for the cash rate to hit a low of 2.5% following two further data dependent 0.25% cuts in the months to come. By the end of 2010 however he expects the cash rate will have risen again to around 3.5%.
With respect to the global economy Oster has revised his GDP forecast down to a decline of 1.75% for 2009, reflecting greater than expected weakness in the Japanese and EU economies. With the pace of decline in global economic activity slowing of late, he expects conditions will moderate in coming months before a relatively weak recovery in 2010.
To reflect this Oster is forecasting global economic growth of just 2.25% next year, with a recovery to performance in-line with trend levels not seen until 2011 when he expects global GDP growth to return to 3.5%.