Australia | Sep 18 2008
By Andrew Nelson
Despite declining domestic demand, financial market turmoil and continued concerns about the broader global outlook, the Q3 Westpac-ACCI Survey of Industrial Trends still showed reasonable, if slightly below trend expansion.
The Index fell from 53.9 to 50.8, its lowest level since 2006Q2 and below the decade average of 53.4. This clearly indicates a slowing in demand, but it still remains consistent with expansion by holding above 50. The read is also well above the four previous lows seen in 2001, 1998, 1995 and 1990 and is also an improvement on the previous quarter’s 50.1 level.
Westpac Senior Economist Anthony Thompson said the below trend read was driven by falls in new orders and employment, slower output
growth and a fall in overtime worked, but was partially offset by a slight rise in the order backlog.
However, Thompson points out expectations for Q4 are firmer, partly due to traditional seasonal strength. The survey predicts next quarter’s read will be a slightly stronger 51.2, which is again below the ten year trend and indicates a slowing in demand, but it nonetheless still indicates growth.
One of the standouts of this quarter’s survey was a sharp deterioration in labour demand, with the Labour Market Composite component of the survey seeing a net balance fall of 10pts to 6. This is its lowest since 2001Q1 and well below the decade average of 9% and was driven by a decline in actual employment and overtime worked. Thompson says that this implies a steeper slowing in jobs growth to 1%yr over 2009H1, which should add upward pressure on the unemployment rate.
With a marked step up in the pace of the jobs growth slowdown, which Thompson says is supported by other preferred leading indicators of labour demand such as job ads and consumers’ unemployment expectations, we have seen an easing in labour market tightness, confirming his view that the unemployment rate will rise towards 5.0% by mid-2009.
Manufacturing wage growth expectations also declined in the September quarter survey, with 10% (vs 12% previously) of the respondents expecting wage rises. While still below the long term trend of 14%, it does point to a slowing in manufacturing wage growth and supports the recent findings from the RBA’s manufacturing wage price index.
Respondents also found finance as “harder to get”, however there was only a small increase in the assumption that this would limit the ability to increase production.
That said, general business confidence deteriorated in the September quarter, with the general business situation net balance falling to minus 22% from minus 16%, its lowest since 2003Q1. Slowing activity and weak profit expectations also dented the investment growth outlook, but Thompson points out that while slowing, it is still in the indicative of expanding total plant and equipment investment over the quarter and year to come.
This is helped by evidence that there is some manufacturing pricing power, although Thompson thinks that this will decrease given the slowing demand backdrop. The net balance for actual selling prices rose to 22% in the September quarter from 13% and while short of prior extremely strong predictions, it is still more than triple its decade average pace of 7% and the strongest read since 2003Q2.
Thompsons argues that the strong read is a reflection of continued extreme unit cost pressures, which are yet to fully reflect the recent pullback in oil prices and more generally, commodity prices.