Australia | Oct 28 2008
By Chris Shaw
There has been no respite in terms of business conditions in Australia, as National Australia Bank’s Business Survey for the September quarter showed a further decline, with sales and profits down double digit amounts and job gains also moderating.
In terms of the actual survey results, business conditions were down 11 points to a reading of -4, a move matched by the trading/sales component, while profits fell 10 points to a -8 reading and employment fell three points to a reading of 2.
As the bank’s chief economist Alan Oster notes, the latest results show business conditions have fallen to levels equal to those of mid-2001, an outcome in line with a slowing in annual non-farm GDP growth to around 2.0% in the quarter. Conditions remain mixed across sectors, with mining and business services remaining fairly strong as most other sectors of the economy deliver poor results.
State by state the results show some divergence as well, with the bank noting the worst results were returned by New South Wales, Victoria and Tasmania, while South Australia was the only state to report positive conditions though even its results were somewhat subdued in Oster’s view.
On the plus side, business confidence appears to have steadied, with Oster noting this has occurred at levels well above those of the 1990 recession. Expectations are still being revised lower however, as reflected by falls in forward orders, hiring intentions and annual capital expenditure plans of businesses.
At the same time, this is helping to ease previous capacity utilisation and labour market tightness, with capacity utilisation down to 82% compared to a record of 84.7% in the December quarter last year and only 62% now responding that labour availability is still a constraint on operations, down from 70% in the March quarter. Unemployment is expected to increase to 6.0% in 2009/10.
In terms of inflationary pressures, Oster notes there are few signs of wage related pressures coming through. However, cost pressures continue to track higher, with purchase cost inflation rising to 4.0% in annual terms during the quarter. A further slowing in business conditions is expected in the December quarter, with businesses suggesting this is due primarily to a lack of demand and the impact this will have on profitability.
Factoring in the survey results sees no change to the bank’s forecasts for either Australian or global economic growth, meaning it remains on the bearish side of consensus numbers. For Australia, the bank expects GDP growth to fall to 1.25% in 2009, reflecting the impact of both slower global growth and falling commodity and share prices.
Attempts to stimulate growth will come in part via additional cuts to interest rates, with Oster expecting the official cash rate to fall to 4.5% by the middle of 2009 from 6.0% now, in line with cuts made by other central banks around the world. Fiscal policy measures are also expected and Oster sees these as pushing the Federal Budget from a surplus of around $1.0 billion to a deficit of around $10 billion.
In terms of the global growth outlook, Oster points out the model now has a new, wider definition as it incorporates the Middle East, Russia and Eastern Europe as well, which lifts global forecasts slightly, as the new additions generally are growing faster than the established basket of countries.
From a forecast for global growth of 3.5% this year, Oster expects a slowing to around 2.5% in 2009, which is well below the International Monetary Fund forecast of 3.9% growth next year. The new estimate factors in lower forecasts for Europe, the UK and Japan and also incorporate likely recessions in the US, UK, Europe and Japan next year.
The ongoing global economic and liquidity crisis will play a role and while Oster expects the various packages implemented by policy makers will eventually produce results, there is no evidence yet of this occuring. As this drags on, investors lose confidence, as wealth continues to be impacted negatively. As Oster points out, this flows through into weaker activity levels and this also weighs on economic growth.
In terms of the various countries, Oster is forecasts 2009 growth of just 0.1% in the US and the Eurozone, 0.2% in Japan and -0.4% in the UK. From expected growth of 9.5% this year, the Chinese economy is forecast to slow to growth of “just” 7.5% in 2009, though the bank’s forecasts for Chinese growth in 2010 have been lifted slightly.