Australia | Jan 27 2009
By Chris Shaw
Having fallen sharply in the previous few months Australian business conditions bounced back in December and recorded a gain of 10 points to a reading of minus 20, according to the National Australia Bank Monthly Business Survey. Group chief economist Alan Oster notes the improvement only brings the reading back up to recession-like levels, only a little better than the lows recorded in the recession of 1990.
Business confidence levels also rose last month and the 11-point gain has the reading back at levels from the middle of last year, but, as Oster points, out the increases were driven largely by jumps in the retail and wholesale sectors, which appears to be a direct result of the Rudd Government’s stimulus package. At the same time, other sectors such as mining, manufacturing and transport recorded further falls.
Given the boost from the fiscal stimulus, both trading conditions and profitability recorded gains for the period, but there was no change in employment readings, Forward orders improved only marginally, but remain quite weak at an index reading of minus 24.
This has not yet impacted on capacity utilisation levels as for the month this reading was essentially unchanged at 80.7%, but it has flowed through into weaker capital spending, which Oster notes fell to a new low of minus 19 points.
The bank recently introduced a measure of credit availability and for December this showed only 17% of respondents indicated credit had become less available in the period. With 39% of those responding indicating they had no need for credit at present, Oster suggests a lack of demand is a bigger issue in the credit market than unavailability of supply.
Assessing all the results from the survey, Oster takes the view as not all sectors saw an improvement in December and with overall business conditions and confidence readings still low and declining in trend terms, it is most likely last month represents a temporary bounce rather than a turning point from what have been overly pessimistic levels.
Given this view, Oster has again pared his growth forecasts for the Australian economy and now expects GDP in 2009 will decline by 0.25%, down from an anticipated gain of 0.5% previously. A number of quarters this year are expected to show negative growth.
He believes any recovery is unlikely to emerge before late this year. As a result his estimate for 2010 growth has also been reduced to 1.0% from 1.75% previously, while a sharp worsening of the labour market suggests unemployment will now peak at around 7% during the cycle. This suggests any recovery will be protracted rather than a faster V-shaped bounce.
Given such low growth expectations, Oster expects the Reserve Bank of Australia (RBA) will cut official interest rates in an attempt to avoid a hard landing for the economy. He expects a cash rate of 3.0% in coming months via cuts of 0.75% and 0.5% at the RBA’s next two meetings. Looking a little further ahead he sees the rise in unemployment as forcing a further 0.5% in reductions to rates in the second half of this year.
Contributing to the revised forecasts for Australian growth are reduced forecasts for the global economy, with Oster now seeing world GDP growth this year of just 0.5% against a previous forecast of 1.7%. This would represent the worst growth since World War II and in Oster’s view reflects the fact the financial crisis is spreading to real economies.
All regions are being impacted and economies are unlikely to bottom before the latter part of this year, as further falls in activity in the US and elsewhere are expected in coming quarters. Any sustained recovery is not expected until sometime in 2010 and next year Oster now expects global GDP growth of 2.5%, which would still be below trend levels.