Australia | Jul 28 2009
By Chris Shaw
The recent rally in Australian share prices suggests the business environment is improving and this fact is supported by the June quarter National Australia Bank Business Confidence survey, which recorded a 20 point jump to a reading of minus 4 points. A similar improvement in business conditions was also recorded, this measure increasing by 11 points to a minus 9 reading.
According to the bank’s chief economist Alan Oster, the survey shows a rise in both near and longer-term expectations and suggests the worst fears of businesses have now eased, expectations with respect to conditions over the next 12 months remain at levels not seen since 1991 and are at best flat on a one-year forward basis.
Other data supports this, as while forward orders increased sharply in the June quarter the indication is they will be flat in the September quarter, meaning they remain near their lowest level since June of 1991. Capacity utilisation in the quarter was unchanged at 80% and was impacted by a continuation of the recent trend of labour shedding, which Oster notes eased from the March quarter but remains at a high level. Business outcomes and capital spending are both expected to weaken over the next 12 months according to the survey.
The main implication from the survey in his view is it suggests modest growth in the economy in the June quarter, a trend Oster expects will prove only temporary as his forecast for a 0.5% contraction in Australian GDP in 2009 remains unchanged.
Oster’s forecast reflects his expectation the wealth impact of the global downturn will keep consumption at relatively low levels, especially given the expectation unemployment will continue to trend higher and reach 8% by late next year and as the recent cash payments from the Federal Government wash out of the system.
As well private investment is expected to decline significantly in coming months given both reduced spending and a terms-of-trade induced fall in income levels.
Looking to 2010, Oster expects GDP growth of around 1.0%, his forecasts implying the Reserve Bank of Australia will remain on hold for some time with respect to interest rates as it looks for signs the recent recovery in the global outlook can be sustained.
Any switch to an increasing interest rate environment is not expected to begin until late in 2010 according to Oster, though he notes if economic results continue to be better than expected it could bring forward the timing of any rate hike cycle. Any hikes are likely to be at a modest pace, Oster forecasting a cash rate of 3.75% by the end of next year and between 5.0-5.5% by the end of 2011.
Supporting Oster’s cautious assessment of the growth outlook for the Australian economy is today’s Conference Board Leading Index figures for May, which fell by 0.1% for its first decline in four months. The result compares to a gain of 0.7% in April, though this figure was today revised down to a gain of 0.3%.
The Board’s index tracks a number of measures such as rural goods exports, building approvals and stock prices. Sales-to-inventory levels are also measured and is the single largest component of the index, the bad news being it recorded its sixth successive month of decline. Retail trade actually rose during the period but was offset by a decline in employment.
This suggests companies are continuing to suffer from weak demand, which has implications for earnings in coming months and suggests any significantly stronger economic numbers remain unlikely in the short to medium-term, esepcially once cost cutting measures being implemented by companies have run their course.