Australia | May 12 2008
By Chris Shaw
Australian business confidence levels stabilised in February and March but figures for April show a downturn to levels not seen for a number of years, this despite business conditions remaining relatively stable for the month. While the mining sector recorded higher readings in both most other sectors experienced falls, with the retail, finance, transportation and personal and recreational services sectors the most affected.
National Australia Bank’s Monthly Business Survey & Economic Outlook for the month showed business confidence levels down 4 points to a minus 8 reading, putting them them below what had been the lowest reading since September of 2001. Business conditions are not any brighter, as the +7 reading recorded for the month remains in line with the lowest level since the end of 2002.
Contributing to the fall in confidence were lower readings for both profits and trading conditions, the former down four points to a +10 reading and the latter three points lower at +2, both of which are the lowest since early in 2002. Forward orders also fell, halving to a +5 reading which is its lowest for almost seven years.
National Australia Bank chief economist Alan Oster notes the labour market remains tight despite the downturn in confidence levels, with employment up five points to a +9 reading, while capacity utilisation also rose to 84.2% from 83.3% previously, an outcome he saw as somewhat surprising given the other numbers.
Oster suggests the results of the survey are consistent with demand growth in the Australian economy slowing to around 3.5%, with further falls likely in his view and in the retail and transport sectors in particular. This compares with demand growth of around 5.5% late last year.
Despite this slowdown wage growth accelerated in the month and is now at 5.2% in year-to-date terms, leading Oster to suggest while the Reserve Bank of Australia (RBA) is now on hold with respect to monetary policy it will remain somewhat nervous with that position as the near-term inflation risks remain high and are increasing.
Leading into tomorrow’s Federal Budget the bank has not changed its growth forecasts for the Australian economy, predicting GDP growth of 2.75% for both 2008 and 2009. While the domestic economy appears to be weakening faster than the bank had expected this should be offset by improvements in the terms of trade, tax cuts and a rebound from the agricultural sector.
Core inflation is tipped to remain at around 4% through this year and is not expected to be back within the RBA’s 2-3% target range until early in 2009, at which time rate cuts are expected to commence and will be significant in the bank’s view. It forecasts 125 basis points in cuts, meaning a cash rate of 6.0% by late in 2009 or early in 2010.
Oster has not adjusted his forecast for global growth this year of 3.5% but recent data have prompted a cut in his estimate for 2009 to 3.25%, reflecting a downward revision to the bank’s US growth forecast next year to 1.75% and the impact of ongoing stronger oil prices. The UK and Europe are also expected to slow further during the course of 2008, offset by continued solid growth performance from China, India and Latin America.