Australia | Nov 10 2009
By Chris Shaw
Even with business confidence having risen to very high levels in recent months there were more gains in October according to the latest National Australia Bank Monthly Business Survey and Economic Outlook results, which showed a two point gain in confidence to a +16 reading.
The gains in the month were centred on the construction, transport and personal and recreational services sectors, while the mining sector posted lower numbers for the period.
The increase in confidence was more than matched by a nine point jump in business conditions to a reading of +12, which puts this measure back above longer-term averages and returns it to levels last seen early in 2008. All parts of the index were higher, with profits up nine points to a +13 reading, trading up seven points to +15 and employment up eight points to +7. All three measures are now back at their highest levels since the first half of 2008.
National Australia Bank’s chief economist, Alan Oster, notes the stronger outcome has had an impact on capacity utilisation, which increased by 2.1% to 82.1%, its highest level since the middle of last year. At the same time Oster points out businesses added to inventories for the first time in more than a year, that measure rising nine points to a +4 reading. Forward orders declined by four points to +3, but this is still a little above long-term average levels.
For October there was a modest increase in labour costs of 0.5% for the month or 0.8% on a quarterly basis, but as Oster notes the annual increase in this measure has slowed to a record low of 0.3% for the year to October. Also at a long-term low were purchase costs, which were flat for the month and for the year to October gained by just 2.0%, the slowest rate of increase since June of 2004.
This offered some good news on economy wide inflation, which while unchanged for October at 0.1% has on a 12-month rate slowed to 0.9% from 1.2% previously. Retail prices were also flat for the month, bringing the annual rate down to 3.0% from 3.4% previously. Oster notes there was little change in credit availability, though those not wanting finance increased to 45%, a survey high, from 41% in September.
On the back of the October numbers Oster has revised up his growth forecasts for the Australian economy, with the second half of FY09 now likely to generate growth of about 0.75% against his previous estimate of a flat outcome. The change reflects his view the slowing in private consumption activity being experienced is being offset by other parts of the economy.
For 2009 Oster’s growth forecast increases to around 1.0% from 0.5% previously, with growth expected to increase to 2.5% in 2010, up from his previous estimate of 2.0%. The stronger growth means unemployment is now tipped to top out at 6.5% in the middle of next year, down from 6.75% previously, while core inflation is now expected to finish 2010 at 2.0%, up from 1.8%.
The changes don’t cause any adjustments to Oster’s expectations for interest rates, which are for the Reserve Bank of Australia (RBA) to lift rates by 0.25% at each meeting until March next year, bringing the cash rate to 4.25%. A pause of around six months is then expected, before a further 50-basis points of increases via two 25-basis point hikes late in 2010. Rates should return to a neutral level of 5.5% by late in 2011 in his view.
Oster’s forecasts for global growth are unchanged at a little below a fall of 1.5% this year and a return to growth of 3.0% in 2010, with recent upside surprises in China and elsewhere in Asia offsetting weaker results from the UK. The US economy continues to perform largely as Oster has forecast, which suggests weak growth through 2010.
While global growth should be positive in 2010 the recovery will be a weak one, Oster noting a number of factors such as increased unemployment, lower private sector demand for debt and the need to increase interest rates will act to keep a lid on the pace of economic recovery. For 2011 his preliminary forecast for global growth is 3.75%, which Oster notes is around the trend rate.