The Australian economic recovery seems to be gathering pace, according to the March business survey from the National Australia Bank.
There’s a distinct impression that economic activity has or is in the process of moving up a gear or two, with the recovery becoming more widespread.
"While 2010 appears to have started somewhat slower than late 2009, the pace of activity appears to have accelerated sharply in recent months," the NAB commented, with the bank estimating growth running at a very strong annual rate of 4.5% in the past six months.
It reconfirmed its interest rate upgrade of late last month, forecasting another rate rise by the Reserve Bank next month, and a cash rate of 5.25% by the end of this year, when the bank sees the unemployment rate hitting 4.5% (and 4% by the end of 2011) from the current 5.3%.
It sees dwelling investment rising 8% this year and by 12% in 2011 and there was no sign in the survey of any impact of the recent slump in building approvals and housing finance that will soon bring the recent surge in house prices to an end.
The stronger reading in March – along with near-term growth expected to be driven by recoveries among Australia’s major trading partners and rising commodities prices – saw the NAB raise its 2010 growth forecast for the economy to 3.5% from 3%.
It also lifted its prediction for growth next year to 4.25% from 4%.
So with that in mind, the small fall in business confidence last month is not important. Instead it pays to concentrate on what happened to business conditions where the NAB found activity moving higher with a sharp rise reported, especially in trading and employment, with profits not far behind.
"Every sector reported better business outcomes in March – with particularly sharp improvements in manufacturing, retail and recreational & personal services," the NAB said.
"Business conditions improved (up 5 points to +13) with sharp improvements in trading and employment – both up 7 points. Profitability improved by 3 points.
"Forward orders also jumped sharply – up 4 to +10 points – even stronger than levels reported in late 2009 and the strongest reading since July 2004.
"That is consistent with growth in domestic demand of around 4.5% in the last 6 months."
Boring measures like capacity utilisation (which is a measure in this survey closely watched by the Reserve Bank) jumped strongly in March, up to 82.1% from 80.7% in February, which caused the NAB to comment:
"Not surprisingly increased growth momentum contributed to a kick in capacity utilisation…that reading is now well above the average reading in the Survey of 81%."
The NAB said that while most sectors are still operating at levels of capacity utilisation well below the highs of late 2007, "the improvement in March in capacity utilisation was very broad based with large increases (around 2 percentage points) in mining, manufacturing, retail and wholesale.
"Most other sectors reported increases of around 1 percentage point, while only construction reported lower capacity levels."
Against this strength, the 3 point fall in confidence to a reading of plus 16 was nothing.
In fact the NAB pointed out that that was "a reading not much below the peaks reached in late 2009"… and "the bigger picture is that confidence remains at very robust levels and is still moving up in trend terms.
"The main sectors reporting lower confidence levels were manufacturing, wholesale and transport – which could well reflect higher interest rates and the strength of the currency. Against that, construction and to a lesser extent retail reported rising confidence."
The NAB had lifted its forecasts on interest rates 10 days ago and reconfirmed them in this latest survey.
"The forecast economic environment clearly needs the central bank to get monetary policy back to normal relatively quickly and move into a significantly tight stance in 2011.
"Accordingly, we see cash rates moving up to 5.25% by end 2010 – which would, in an environment of higher bank spreads, be a touch on the tight side of neutral.
"While every RBA meeting is "potentially live" depending on data, we have pencilled in rate rises in May, August, September and December.
"Moving into 2011 we expect rates to rise to 6% which is both above current market pricing and around 0.75% above neutral."
