Australia | Jun 14 2011
– NAB Survey shows Oz economy softened further in May
– Both business confidence and conditions were weaker in the month
– NAB'S GDP growth forecasts for Australia trimmed for 2011
– Two rates hikes expected in 2011, first in August
By Chris Shaw
National Australia Bank's Monthly Business Survey for May showed the domestic economy continued to soften in May, with both business conditions and confidence levels falling for the month. For business conditions the fall was to a reading of 1, which is down from a reading of 5 in April and 10 in March.
Business conditions are now only slightly above the flood-impacted levels of February. Conditions in Tasmania continue to recover and were also higher in Queensland in May, while declines were registered in New South Wales, Victoria and Western Australia.
Business confidence also fell but not as sharply, the survey delivering a reading of 6 for May, which compares to 7 in April. Business confidence is now a little below its long-term average reading. Confidence fell in South Australia, Tasmania and New South Wales, while improvements were recorded in WA, Queensland and Victoria.
NAB chief economist Alan Oster notes the survey shows conditions in retail, manufacturing, wholesale and construction remain very poor, while conditions in the mining sector continue to outperform all other industries.
Oster suggests the strong Australian dollar may be eroding sentiment in the manufacturing and wholesaling sectors, while confidence remains highest in the mining, finance, business and property sectors.
The May survey revealed a fall in forward orders to a reading of minus 2, down from minus 1 in April and 3 in March. Capacity utilisation also declined slightly to 81.6% from 81.7% previously, but Oster notes this measure remains above its long-term average. This suggests a further tightening in the labour market in coming months.
Labour cost growth and price inflation were also softer in the month, while stocks fell to a reading of 1 from 3 previously and exports delivered a minus 4 reading, down from minus 2 in April.
As Oster points out, the May survey incorporates a re-estimation of some seasonal factors, something which will now be done on a monthly basis. The result of this re-estimation and the survey results sees NAB trim its growth outlook for Australia, with GDP growth now expected to be 1.8% in 2011, down from 2.1% previously.
This is offset by an increase to growth expectations in 2012, with Oster now forecasting GDP growth next year of 4.8%, up from 4.4% previously. The increase reflects strong income, rebuilding in Queensland after the floods earlier this year, and increases in coal exports and mining investment.
With respect to interest rates, Oster now expects the next rate hike to 5.0% by the Reserves Bank of Australia (RBA) will be in August, with a final adjustment to 5.25% expected towards the end of the year.
In terms of the global economy, Oster now sees growth slowing to around trend, this reflecting higher oil prices, a slowdown in the Japanese economy and monetary policy tightening measures in a number of economies.
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