Australia | Oct 13 2009
By Chris Shaw
Having surged in recent months Australian business confidence and conditions both took a breather in September, the National Australia Bank Monthly Business Survey and Economic Outlook for the month showing slight falls in both readings.
Confidence was down four points to a plus 14 reading, which the bank’s chief economist Alan Oster notes is still above the longer-term average level. The decline was centred in the manufacturing, wholesale and retail sectors, with construction the only sector to strengthen over the month.
Business conditions declined one point to a plus 3 reading, which is slightly below the long run average, as trading and profitability both declined by enough to offset a strong reading for employment. The numbers were mixed across industries, Oster noting manufacturing, mining and finance all improved while wholesale and transport weakened significantly. Overall, he suggests, the results indicate some softness in the more cyclical sectors as fiscal stimulus measures fade.
One measure to post significant improvement was forward orders, which increased by nine points to return to a positive reading of plus 7, which is its highest level since November of 2007. The increase here was again driven by gains in the mining, manufacturing and construction sectors, with the cyclical sectors generally reporting slightly softer results.
Oster notes capacity utilisation in the month fell 1% to 79.9%, reflecting the ongoing trend of a running off of stock levels. Labour costs during the month rose slightly, up 0.3%, making for a quarterly rise of 0.5%. This was offset by falling purchase costs thanks to the stronger Australian dollar, the 12-month rate for this measure slowing to 2.9%, which Osterpoints out is the lowest since September of 2004.
Retail price increases are finally starting to ease, falling 0.2% for the month, bringing the 12-month rate to 3.4%, down from 3.8% previously. At the same time credit is becoming more available, Oster noting the difficulty in finding credit index fell to plus 7 points in the month against a reading of plus 18 previously. September also saw a sharp jump in those not wanting credit, this measure increasing to 41% from 30% previously.
Factoring in the monthly data sees no change to Oster’s forecasts for the Australian economy, which implies a broadly flat growth outcome for the second half of 2009 and growth for the full year of around 0.5%. Growth is expected to pick up in 2010 to around 2.1%, which he notes is broadly consistent with the Reserve Bank of Australia’s (RBA) expectations of a return to a trend growth rate sometime in 2010.
Oster continues to expect unemployment to rise in coming months, peaking at around 6.75% sometime in the third quarter of 2010. With the RBA moving to lift rates earlier than he had expected, Oster now sees a process of consecutive rate hikes of 0.25% in the next two meetings, lifting the cash rate to 3.75% by the end of the year rather than by February as he had previously forecast.
After that Oster expects the RBA will hold steady on rates for around six months before resuming the increases to bring the cash rate back to a neutral level of around 5% by 2011. In timing terms this implies rates end 2010 at 4.25%.
For the global economy Oster expects growth in 2009 will decline by just more than 1.5%, though within this estimate his forecast for the US economy has improved slightly to a decline of 2.7% this year against a 3% fall expected previously. In 2010 Oster has lifted his US growth forecast to 2.1%, while there is no change to his estimates for growth in China of 8% this year and 9% in 2010.
Growth in Europe and the UK will be weak next year with Oster forecasting less than 1% growth for both, while he has trimmed his Eastern Europe and Russia estimates slightly. The overall impact is a slight increase in his global growth forecast for 2010 to around 3%, which he notes would still be a subdued result for the recovery phase of the economic cycle.