Australia | Sep 08 2009
By Chris Shaw
Broad-based gains have seen Australian business confidence rise to its highest level since October of 2003 according to the National Australia Bank Business Survey and Economic Outlook report for August. The survey also showed business conditions edging higher.
In terms of actual numbers, business confidence improved by eight points to a reading of positive 18, which the bank’s chief economist Alan Oster notes puts it well above long-term average levels. Gains were spread across the economy but were most noticeable in the retail, finance, manufacturing and recreational and personal services sectors. Construction and transport were the only sectors of the economy to report lower numbers for August.
Business conditions also rose but by only three points to an overall reading of positive 4, which puts it close to long run average levels and is the best outcome since the middle of 2008. Oster notes the gain was helped by a strong increase in trading, up eight points to a positive 12 reading, while profitability rose 10 points to positive 11.
Not all the numbers were better though as Oster notes forward orders fell seven points on the month and now stand at negative 2, with interest rate sensitive sectors leading what was a broad based decline. Capacity utilisation also fell to 80% from 80.4% previously, Oster seeing this as a reflection of a still aggressive run-off in stocks.
Labour costs also increased marginally in August but Oster notes purchase costs eased at an annual rate of 3.4%, the lowest level since November 2007. The figures also suggest credit availability tightened slightly in the month, Oster noting the “difficulty in finding finance” index was up to positive 18 points from positive 14 points last month, with those finding significant credit constraints increasing to a reading of positive 10 points from positive 5 previously.
Factoring in all the numbers has seen Oster lift his forecast for Australian economic growth in 2009 to 0.5% from a flat outcome previously, the new estimate allowing for a slight fall in growth late this year as some of the current momentum fades as stimulus measures end.
For 2010, Oster is now forecasting Australian GDP growth of 2.1%, up from his previous estimate of 1.25%. The new forecasts reflect the current strong momentum in domestic demand orders, though as he points out there are some signs of a slowing in new orders and a weakening labour market for the economy to contend with.
Given his new growth estimates Oster now expects unemployment to top out at around 6.7% late in 2010, down from his previous estimate of a peak of about 7.25%. There will still be a significant output gap in his view given a corresponding reduction in hours worked and this plus a stronger Australian dollar outlook means inflation should continue to slow.
According to Oster the latest data shows the Reserve Bank of Australia (RBA) believes interest rates have bottomed and the upward adjustment process must soon get underway, but any move on rates remains data-dependent with November the most likely starting point in his view.
The most likely policy path for the RBA, according to Oster, is for three 0.25% hikes in November, December and February, which would put the cash rate at 3.75%, with rates to continue moving higher to around 4.5% by the end of 2010 and to 5.5% by the end of 2011.
With respect to global growth, Oster has also lifted his estimate by around 0.25%, putting his forecast for global GDP for 2009 at a decline of just under 1.5%. The change reflects better numbers from non-Japan Asia and to a lesser degree Europe, with the former now expected to decline by around 2.5% this year against his previous estimate of a fall of about 5% before improving to growth of about 3.3% in 2010.
Small increases have also been made to Oster’s forecasts for Japan and Europe but there is no change to his estimates for GDP in the US, which stand at a decline of 3.0% this year before modest growth of 1.75% in 2010. The changes mean global GDP growth for next year is now forecast at 2.75%, rising to around 3.6% in 2011.