The Reserve Bank will take some heart from the latest business survey from the National Australia Bank, but not as much as perhaps it should.
The survey shows a slight recovery in confidence in February from the big drop in January. It wasn’t much, just two points, off the seven year low hit in January, but not enough to signal any bounce back in sentiment.
(If that’s the case then confidence levels this month will have taken a battering as February was mostly a month of recovery in markets, although the Reserve Bank lifted rates and switched to a hawkish stance on inflation.)
The NAB said the two point rise followed January’s sharp 9 point drop, but it remains low at minus-2 index points, and was ”still tracking down”, according to the survey.
"As such, it is not really surprising that business remain worried," the survey commented. Rising interest rates, the gloomy news from the US and financial market unrest have made for a tough set of conditions for business to face at the moment.
The largest falls in confidence were in the wholesaling sector, due to an expected slowing in retail sales, and finance and business services.
News of big price rises for iron ore and coal contracts helped mining sector confidence, which recorded a massive increase.
The NAB said the business conditions dropped a further two index points to 11 points, nine points lower than its peak in October 2007.
The NAB commented that "business confidence fails to materially recover, following the large fall in January".
It said there was a further easing, though conditions were "still reasonable".
Global growth forecasts unchanged at 3.75% for 2008 – US at 1.25% with Fed to cut to 2% or lower.
The "US result is little better than 2000 but fears of a significant and pronounced recession overdone. China is still very strong," the bank commented.
Australian GDP growth forecasts lowered to 2.75% for both 2008 and 2009 – with latter nearer 2.5% for the non-farm sector.
"Australian GDP forecasts lowered to 2.75% in 2008 given lower equity market wealth effects and tighter financial and fiscal policy.
"Higher terms of trade and the farm rebound help to partly offset this."
The NAB said it now believed that the " RBA was now on hold and waiting for further signs of slower demand".
The NAB said it sees the cash rate cycle as having peaked and the RBA will be in significant cutting mode during 2009.
New orders again eased marginally (down 1 to +3 points), "but in trend terms a slowing is apparent".
"Capacity utilisation, remains at high levels – unchanged at rate of 84.1 per cent in February; most sectors report significant moves down in both confidence and conditions recently (especially in manufacturing, construction and finance, but that has been lessened by strong improvements in mining," The NAB said.
"Overall, the Survey is consistent with domestic demand growing around 4% in early 2008 – well down from around 5.5% in late 2007 and reinforcing the view that the peak in demand has already passed;
"Wages growth was relatively steady both in the month and in the year to readings – unchanged at 5.1%, albeit with large variations across industries.
"Retail price pressures edged up a touch in February (up 0.2 to 0.6% on a quarterly basis), but the annual rate remained unchanged at recent highs of 2.7%, "The NAB concluded.
"Core inflation forecasts still expected to peak at 3.75% in June 2008 and not back into the RBA range till early 2009. RBA more bearish with core inflation not back to 3% by 2010."
