Australia | Jul 14 2009
By Chris Shaw
The global economy is still doing it tough but the numbers on the Australian economy continue to show a resilient performance, as evidenced by improvements in both business conditions and confidence levels in the latest National Australia Bank Monthly Business Survey and Economic Outlook report.
The June results show a sharp increase in business conditions, moving to a minus 2 reading from minus 14 previously and putting the index back at levels seen in September of last year with all components recording higher results. Confidence also rose and has now returned to a positive reading for the first time since December of 2007 at 4 index points against minus 2 points previously.
Driving the gains in both measures were improved performances in the manufacturing and finance divisions in particular, while the bank’s chief economist Alan Oster notes the construction and wholesaling divisions also performed better over the month.
The improvement in conditions was reflected in gains in both trading and profitability readings, Oster noting trading rose 10 points to a +3 reading while profitability gained seven points to a reading of minus 2. The latest results see both indexes back at levels of last December, when the first government stimulus payments were being received.
Forward orders also increased in the month, the 14 point jump in June’s reading returning it to a level of zero, driven by stronger retail orders from the car industry in particular as buyers took advantage of investment allowances. Capacity utilisation didn’t show the same level of improvement however, Oster noting this reading changed only marginally to 79.3%, up from 79.2% in May. The improvement in capital spending was more significant, this measure jumping 16 points to a reading of 6.
While there remains some moderate labour shedding in the economy, Oster notes the employment index jumped 18 points to a reading of minus 7, which is the largest monthly jump in this reading in the history of the survey. Despite the improvement labour costs were flat for the month, Oster pointing out higher wages were offset by lower employment levels overall.
Prices across the economy fell slightly in the month in a reflection of flat purchasing costs and a stronger Australian dollar, pushing down annual inflation to 2.2% from 2.7% previously. But with retail prices only now starting to slow Oster suggests there is some risk core CPI for the June quarter could surprise on the upside and come in at more than 0.7%.
Oster also notes credit market conditions continue to improve modestly, 15% of respondents suggesting credit was tougher to obtain in June against 22% in May. There remains a reluctance to borrow however, as Oster points out 43% of respondents had no demand for credit, up from 33% in May and at a new record level.
While the survey results suggests some upside to current levels of economic activity, Oster has not changed his forecast of Australian GDP contracting by 0.5% in 2009, reflecting modest growth in consumption given the wealth destruction endured during the financial crisis as well as weaker levels of private investment.
Growth should return to the positive side of the ledger in 2010 albeit at a modest rate of 1.0% on Oster’s forecast, with the turning point for the economy likely to be either late this year or early next year. With no change to this forecast there is also no change to National’s unemployment expectations, with the rate tipped to hit 7% by the end of this year and 8% by late in 2010.
The improvement in conditions and confidence leads Oster to suggest there is an increased risk the Reserve Bank of Australia (RBA) tries to ride out the next few months, meaning the central bank is likely to be on hold for longer with respect to interest rates.
There remains the chance of further modest cuts later this year if the labour market continues to deteriorate, while Oster doesn’t expect rates to increase before the second half of next year. The cash rate is forecast to reach 3.75% by the end of 2010.
With respect to the global economy, Oster notes outside of China there remain few signs of sustained economic growth as the recovery process remains in its early stages. Conditions do appear to be stabilising as the pace of decline in global output and other measures such as export volumes appear to have settled, albeit at low levels.
As Oster points out, any sustained recovery will require growth in final demand and in private demand in particular and here the bank is expecting a relatively weak recovery. As a result its forecasts call for global growth to fall by almost 1.75% this year before a return to positive growth of 2.25% in 2010. A return to long-term trend rates is not expected until 2011, when the bank forecasts global GDP growth of 3.5%.