The National Australia Bank has upgraded its growth and employment forecasts for 2010 and 2011 as it sees Australia continuing to climb from the slump of 2009.
The Bank’s updated surveys, made in its December business survey, anticipate updated forecasts from the Reserve Bank in Friday’s first Statement on Monetary Policy for the year.
Besides seeing growth accelerating this year and next, the NAB sees unemployment falling to under 5% this year, interest rates rising and inflation edging past 2% and then 2.5% over the next year to 18 months.
In fact the bank says unemployment has peaked at 5.8% (where it was for much of the year up to December when it surprised by falling to 5.5%) and could drop to 4.75% by the end of this year and even lower in 2011.
"Indeed, labour market conditions in Q4 are the strongest since May 2008," the NAB said in commentary.
It warns this will cause wage pressures as shortages appear, but doesn’t see inflation topping 3% over the next two years (2.6% by late 2011).
"For 2010 we have raised our growth forecasts a touch to 3% (previously 2.75%) and still see growth accelerating to around 3.75% in 2011.
"In financial year terms this equates to growth of 2% in 2009/10 and 3.25% in 2010/11."
The NAB says interest rates will go up today after the RBA board meeting, and after a pause next month; then rise to around 4.75% by the latter months of the year and 5.5% by the end of 2011.
The forecasts came as the bank reported that business confidence fell in Australia in December, but business conditions remained strong.
The survey, delayed by the Christmas-New Year and holidays showed however that business confidence remains above its long time trend, despite the 11 point fall in the month.
The NAB said the "fall may represent a return to greater realism given current activity and trading conditions.
"Overall the falls in confidence were broadly based – but more marked in retail, transport and personal and recreational services.
"That suggests that RBA actions (and the high AUD) are starting to moderate expectations."
But the reduction had been linked to any change in business conditions. If anything, they appear to have strengthened a little.
"Business conditions were unchanged at +10 index points in December.
"That said, reflecting differences in seasonal factors, trading and profitability both improved marginally – by 2 and 1 points to respective readings of +17 and +12 points.
"A more marked improvement was evident in labour conditions – with the index up 5 to +7 points (indicative of continuing labour hiring).
"Business outcomes across sectors were mixed. Retail, wholesale and especially personal and recreational services reported significantly weaker outcomes.
"But transport, finance & business services, and to a lesser extent manufacturing improved.
"After sharp improvements in recent months, forward orders edged back somewhat (down 2 points) to a still strong +7 index points – broadly consistent with domestic demand increasing by around 4.75% in the second half of 2009.
"By state, Western Australian confidence continues to trend higher and is now clearly the most optimistic state.
"Confidence in other states has turned down by similar magnitudes and is broadly at similar levels – the clear laggard in confidence remains Queensland.
"Turning to activity (business conditions) South Australia and Victoria continue to out perform and trend higher.
"NSW is improving and very much is in the "middle of the pack" while Queensland and Western Australia (in marked contrast to its confidence reading) continue to lag.
"Our current expectations of growth of between 0.75% – 1% in Q4 would see Australian GDP average 1% in 2009.
"The Survey also points to continuing strength in forward orders and confidence levels. It now appears that business is re-employing, raising capacity utilisation and very tentatively raising longer run investment intentions.
"In addition public sector demand is expected to still grow by around 5.5% in 2010.
"For 2010 we have raised our growth forecasts a touch to 3% (previously 2.75%) and still see growth accelerating to around 3.75% in 2011.
"In financial year terms this equates to growth of 2% in 2009/10 and 3.25% in 2010/11.
"With the economy now growing near trend and sufficiently to increase employment – both in hours worked and on a heads basis – it appears that the peak in unemployment passed at 5.8% (a remarkable achievement).
"Applying our growth numbers suggests that unemployment will fall to around 4.75% by end 2010 and 4.25% by end 2011. Productivity has been reduced in our new forecasts and a tighter labour market means that inflationary forces will be more apparent.
"That said, there is little evidence of labour shortages re-emerging and the higher currency should help keep inflationary pressures under control.
"We expect core inflation (as measured by the RBA’s preferred measures) to be 2.3% (compared to the previous forecast of 1.9%) by end 2010, rising to around 2.6% in late 2011.
"We expect the RBA to increase rates by 25 points later today. That said the RBA appears to be close to pausing.
"Our judgement is that having done 100 points they will now pause in March and assess the e
