Australia | Aug 12 2008
By Chris Shaw
While last week’s labour market figures were stronger than expected, the split nature of the Australian economy remains evident following National Australia Bank’s July Monthly Business Survey and Economic Outlook. The latest results show a continued deterioration in business conditions.
Business conditions recorded a five point fall to a reading of -5, which means they are fast approaching their lows of 2001 and falling at a pace last seen in the early 1990s. In an early warning for the Australia’s looming profit season, the survey showed profits fell 10 points to a reading of -11, while employment and trading both weakened further.
The fall in business conditions was broad based, with the survey showing only the personal and recreation services sector posting a higher number for the month, though still remaining at low levels. All other sectors fell, with the sharpest falls of late coming in the mining, manufacturing and wholesaling sectors of the economy.
The bank’s chief economist Alan Oster suggests the numbers imply demand growth in the Australian economy has slowed to around 1.0% on the back of a three point fall in forward orders to -6, while at the same time confidence has fallen to around 1991 levels.
The fall in demand has seen capacity utilisation fall to 81.6%, which is its lowest reading for three years and well down from the peak in October 2007 of 85.1%. At the same time wage growth has risen to around 5.4% on the bank’s numbers, though this is below the increase in purchase costs of 5.9% over the year, which is the fastest rate of increase on record.
As Oster points out, the results of the latest survey mean the Reserve Bank of Australia (RBA) will now move to address the slowing in the economy rather than targeting inflation and this means rate cuts are coming. On Oster’s forecasts there will be 50 basis points in cuts by the end of the year and 1.25% in cuts over the next 12 months.
Despite the weaker survey numbers, Oster has not changed his growth forecasts for the Australian economy, which remain at 2.75% in 2008 and 2.25% in 2009. This disguises the fact it will be the agricultural and mining sectors delivering the growth, as outside these two sectors growth will be around 1.0% only.
This lack of growth in much of the economy supports the bank’s rate cut expectations as Oster points out the risks are to the downside if monetary policy is not eased significantly given how tight current conditions are. Even allowing for the forecast rate cuts Oster doesn’t see any further increase in inflation, retaining his forecast of 4.0% through 2008 before a return to the RBA’s target range of 2-3% by mid to late in 2009.
There are also no changes to Oster’s global growth forecasts, which remain at 3.4% this year and 2.8% in 2009. The US is a major cause of the weak growth outlook, as on Oster’s numbers, it will deliver growth of just 0.8% in 2009, down from an expected 1.5% this year.
EU growth will also be very weak next year in his view, at 0.7%, an outcome that would be around half the 1.5% forecast for 2008. Chinese growth is also forecast to slow from an anticipated 9.5% this year to just over 8.0% in 2009. New Zealand is forecast to go the other way and lift growth from a forecast 0.4% this year to 1.5% in 2009.