Australia | Apr 13 2010
By Chris Shaw
National Australia Bank's Monthly Business Survey and Economic Outlook for March showed some mixed data, as while there was a slight fall in business confidence levels, business conditions strengthened noticeably.
Business confidence fell three points to a reading of plus 16, but as the bank's chief economist Alan Oster points out, confidence remains at levels not far below the peak readings of late 2009. Falls were recorded in the wholesale, manufacturing and transport sectors, while construction and retail reported some improvement.
Improvements in trading, employment and profitability drove a five point improvement in business conditions, with employment now stronger than at any time since November of 2007. Every sector posted gains in conditions for the month, with the sharpest improvements in the manufacturing, retail and recreational and personal services sectors.
Forward orders were similarly stronger, the four point jump to a plus 10 reading meaning this measure is at its highest level since July of 2004. Oster notes this is consistent with growth in domestic demand of about 4.5% in the last six months.
With growth momentum picking up capacity utilisation is also moving higher, rising to 82.1% in March from 80.7% previously. While utilisation is trending higher, Oster points out export demand, with the exception of the mining sector, remains weak.
The March data show labour cost pressures continue to build, increasing by 1.1% on a quarterly basis. This is the highest reading since October of 2008 and helped drive a 1.6% increase in annual wages growth for the year to March. Wages in the mining sector in particular were stronger.
The stronger Australian dollar means purchase costs remain low, as despite a slight increase in March in annual terms, the rate remains stable at around 1.0%. Oster notes price inflation pressures also appear well under control as economy-wide inflation flattened to a quarterly rate of 0.1% in March. The 12-month rate has fallen to 0.4% from 0.5% previously.
With momentum in the economy picking up Oster has lifted his Australian GDP forecasts, now expecting growth of 3.5% in 2010 and 4.25% in 2011. This is up from 3.0% and 4.0% previously and also reflects stronger commodity prices and faster growth for Australia's major trading partners.
Given increased growth expectations, Oster now sees unemployment falling to 4.5% by the end of this year and 4.0% by the end of 2011. At the same time he has lifted his inflation forecasts slightly to 2.5% by the end of 2010 and a little above this by the end of 2011.
In such an environment Oster expects the Reserve Bank of Australia (RBA) will lift rates to the tighter side of neutral by the end of this year. His forecast is for the cash rate to end 2010 at 5.25%, which implies increases to rates in May, August, September and December. Oster sees the cash rate peaking at 6.0% by the middle of 2011.
Growth forecasts elsewhere have also been lifted, Oster increasing his global GDP estimate to 3.9% this year, up from 3.5%. The change this year reflects a lift in forecast Chinese growth to 9.5% in 2010 and a sharper rise for the rest of non-Japan Asia. He expects growth of 4.0% in 2011.
The growth outlook for the US has also improved and Oster has lifted his forecasts to reflect this, now anticipating growth in that economy of 3.25% this year, up from 2.5% previously. US growth in 2011 is forecast at 3.0%.
Europe and the UK remain the biggest drags on world growth, Oster forecasting GDP growth of just 0.9% this year and 1.5% in 2011 for the euro region and 0.7% and 2.5% respectively for the UK.