Australia | Feb 16 2010
By Chris Shaw
Australian business confidence and conditions have gone in opposing directions in January, a NAB survey has found. Business confidence has bounced back to very high levels in January, the National Australia Bank Monthly Business Survey and Economic Outlook for the month showing a seven point increase to a reading of plus 15.
The result reversed the 11 point decline recorded in December, and as the bank's chief economist Alan Oster notes, confidence levels appear to be stabilising at surprisingly high levels after improvements in the manufacturing, finance and business services and personal and recreational sectors of the Australian economy.
Business conditions, however, have gone the other way as the survey showed a seven point fall to a plus three reading, the result driven by weaker trading conditions, which fell 14 points, and profits, which were down 10 points.
The retailing and mining sectors in particular posted weak business conditions, while forward orders were down 11 points to a reading of minus four, meaning a return to levels last seen in the middle of last year.
Better news in Oster's view was stocks were broadly unchanged for the month, while capacity utilisation rose slightly for the month to 82.1% and is now at its highest level since the middle of 2008. He suggests any further improvement in this measure would require stronger trading conditions.
Capital expenditure was again weak in January while Oster notes credit conditions also eased further, to the extent the difficulty in finding finance index was at four points, down one point from December. Those not wanting finance rose to 47% from 37% previously.
One point of interest in Oster's view was the rise in labour costs, which were up 0.9% on a quarterly basis compared to 0.5% last month. This means there has been a significant shift up in wage costs from the bottom of the cycle in the middle of last year as the January reading was 1.0% against 0.6% in December, reflecting a tightening of the Australian labour market.
This has yet to flow through to inflationary pressures however, as Oster notes economy-wide inflation remained subdued at 0.2%, while the 12-month rate slowed to 0.5% from 0.6% previously. With retail prices also subdued, annual retail inflation showed from 2.4% the previous month to 1.9% in January, is lowest rate since March of 2007.
On the back of the survey results Oster has not changed his domestic activity or labour market forecasts as the numbers continues to indicate a reasonable degree of momentum along with the high levels of business confidence.
Public sector demand is forecast to grow by around 5.5% this year and given this Oster has held his GDP forecast for Australia for 2010 unchanged at 3.0%, accelerating to growth of 3.75% in 2011. This implies financial year growth of 2% in FY09/10 and 4.25% in FY10/11.
His growth numbers indicate unemployment falls to around 4.75% by the end of this year and 4.25% by the end of 2011, while Oster expects core inflation of 2.3% by the end of 2010 and 2.6% late in 2011.
Oster also retains his view the official cash rate needs to be around 4.75% by the end of this year and to reflect this he has factored in rate hikes in May, June, August and November, though he suggests every meeting will be a live one with any decision to be dependent on the data available at the time. Rates are expected to become restrictive in 2011, peaking at 5.5% by late next year.
Global growth forecasts have also been retained, Oster anticipating GDP growth of 3.5% in 2010 and an increase to close to 4.0% in 2011. Underpinning these estimates is an expectation of a strong rebound in Chinese growth this year to around 9.3%, which should support non-Japan Asia as a whole.
While the US economy is expected to post a strong rebound in manufacturing this year, other sectors look less robust. Oster sees some upside risk to his growth forecast of 2.5% for 2010. Growth in Japan for this year has been revised up to 2.25%, while forecasts for Europe and the UK have been lowered slightly to reflect the fact both economies are continuing to struggle.