Australia | Nov 11 2008
By Chris Shaw
October was again a bad month for global equity markets but it also proved to be a bad month for the economic outlook in Australia as the National Australia Bank’s Monthly Business Survey and Economic Outlook statement again fell sharply in the period.
The October survey showed business confidence fell by a record 21 points to a reading of minus 29, putting it at a record low. Business conditions also fell sharply and were down 10 points to a reading of minus 11. This puts it at a similar level to the bottom of the economic slowdown of late 2000/early 2001.
The fall in confidence was broadly based in terms of both sectors of the Australian economy and the various states, the bank noting the largest falls were in the construction, retail, wholesale and transport sectors while New South Wales and Victoria in particular reported weak results. Business conditions were also weak but the reading was helped by some improvement in both the mining and wholesale sectors.
There was further bad news in the survey as trading conditions fell 11 points to a minus 10 reading, profitability was down nine points to minus 13 and employment declined eight points to minus 10, which the bank’s chief economist Alan Oster regards as quite a sharp fall and one that suggests there is some shedding of labour going on.
According to Oster the major concern in the survey was the dramatic fall in forward orders, which were down 10 points to a minus 20 reading and mean there will likely be cuts to future corporate employment and business investment plans. This is expected to further weigh on confidence levels in coming months.
While annual wages growth fell slightly in the month the bank notes purchase costs continue to sure, while 25% of respondents to the survey reported a tightening in credit conditions in the month. This was particularly the case in the finance, property and business services sectors. This figure is expected to increase to 35% in the November survey.
The only good news to come out of the survey is the bank has not changed its growth forecasts. Oster continues to expect Australian GDP growth of 1.25% in 2009 and 2% in 2010 (note: these forecasts are below this week’s revised RBA forecasts). Unemployment is forecast to reach 6% by late in 2009 and 6.5% by the middle of 2010.
As Oster notes these forecasts are more bearish than recent government forecasts, while they also imply a federal budget deficit of around $10 billion in 2010. Inflation is still expected to return to the Reserve Bank of Australia’s (RBA) target band of 2-3% by the second half of 2009, though much depends on the severity of the current economic downturn.
With the RBA now focused on dealing with the economy rather than inflation the bank expects further cuts in official interest rates, with its estimates calling for a 0.75% reduction in the official cash rate in December and a further 0.75% cut early next year, which would bring the official cash rate down to 3.75%.
Globally Oster continues to forecast GDP growth of 2.4% next year, with recessions expected in the US, Japan, the UK and Europe and a further moderation of growth in emerging economies such as China. Policy officials will attempt to offset this by further cuts in interest rates, with the bank expecting rates to bottom at 0.5% in the US, 2.5% in Europe and 2.25% in the UK.