Australia | Jul 29 2008
By Chris Shaw
Businesses continue to find it tough going in the Australian economy at present as the National Australia Bank’s Quarterly Business Survey shows confidence levels have fallen to their lowest level since the country was coming out of the 1990 recession.
Business Confidence fell four points to a reading of minus 8, with sectors exposed to interest rates bearing most of the weight as evidenced by weak numbers in the transport, construction, retail and property sectors in particular. As confidence levels have fallen so too have business conditions, which recorded a seven point fall to a reading of 6, an outcome the bank’s chief economist Alan Oster suggests is consistent with growth in domestic demand falling to around 2.0-2.5% by the middle of the year. (We don’t known the official data yet).
As businesses adjust to the poorer outlook expectations are falling, Oster noting this is resulting in investment intentions and forward orders also being revised significantly lower. This suggests capital expenditure levels should track lower in coming months.
One bright spot from the numbers is capacity utilisation and tight labour market conditions are now starting to ease, an outcome the Reserve Bank of Australia (RBA) should be a little happier with as it implies a reduction in inflationary pressures given wage pressure has to date been kept under control.
Oster notes price pressures continue to be a concern though as while retail margins have been cut purchase costs are continuing to accelerate, meaning the RBA will need to remain vigilant as the inflation threat to the broader economy has not yet been eliminated, so the bank doesn’t expect interest rates will begin to come down until early next year with an eventual target of a cash rate of 6.0% by late 2009 or early in 2010.
As a result the bank has retained its inflation forecast of around 4.0% for 2008 and a return to the RBA’s 2.0-3.0% target range around the middle of 2009. It has also kept its growth forecast for this year unchanged at 2.75% but brought down its 2009 forecast by 0.5% to 2.25%, reflecting both the sharper than expected downturn already experienced and current global factors. Looking forward an initial assessment of growth in 2010 suggests something in the order of 2.75%.
As well Oster retains his forecast for global growth in 2008 of 3.4%, though his forecast for 2009 has been cut to 2.75% to reflect a weaker growth outlook in the US as financial conditions are likely to remain tighter for longer given the ongoing credit market issues.
This means growth in the US in 2009 is now forecast to be just 1.0%, down from his previous estimate of 1.75%. While a mild recession remains the most likely outcome there are increasing risks of a hard landing in his view. Other economies will also slow as a result of the weakness in the US, with Oster forecasting growth in China next year of 8.25%, down from its recent rate of above 10%.