Budget time tonight and it is really going to be a case of look for the fiscal measures because monetary policy has already been taken care of by the Reserve Bank and there are no nasties lurking anywhere, except if Mr Costello and Mr Howard prove to be too generous.
No one should be in any doubt that whatever respectability the Government claims on the broader economic picture, the real story from the budget is that it is an election year: the budget surplus is huge and will stay that way for a year or three longer and Messrs Costello and Howard are desperate for re-election.
Normally that’s a recipe for concern but as the RBA signalled last week and the National Australia Bank confirms with its latest monthly survey, the economy is in a sweet spot that won’t be soured by a vote catcher later tonight.
(And if it was, the RBA stands ready to end the party with a rate rise and stern comment or two.)
The NAB is by repute one of the favourite external business surveys, with the RBA especially liking its ability to tap into business at a micro level and to measure things like capacity utlisation and provide information on a monthly basis, which is a bit more timely than from the bank’s other sources.
The NAB said yesterday its monthly business survey showed that the April business conditions index slipped one point to 16 index points, despite steady activity in most sectors during the month.
That’s good news. (The zero line in the NAB’s survey separates growth from contraction and any reading firmly above that, say like 16 in the latest survey, indicates that business conditions remain strong.)
The NAB’s chief economist, Alan Oster, said there was little change in the survey’s key components of trading, profitability and employment during the month.
The trading sub-index remained steady on 24 points, while profitability rose one point to 17 index points.
This was offset by a moderate two point decline in employment to nine points.
Business confidence improved, rising three points to 13 as the stable business conditions eased rate hike fears.
Mr Oster said the main source of the three point improvement in business confidence “was further strength in retail confidence and a reversal of last month’s fall in mining confidence”.
He said business conditions in these sectors have continued to improve since late 2006. (We have seen that in retail with solid figures for January and February, with March’s figures out today)
Mining continued to report the strongest overall activity, but had begun to weaken in recent months business and financial services strengthened from already strong levels, while construction activity also remained at relatively high levels. Personal and recreation, retail and wholesaling and manufacturing all improved in April.
Mr Oster said that while business activity was largely strong during the month, there was an easing in the forward orders index, which was down seven points to three index points.
“This reverses a number of strong months and needs to be watched as the decline appears mainly related to retail, wholesale and manufacturing orders,” Mr Oster said.
He said exports continued to disappoint, remaining unchanged at zero points.
Meanwhile, wages pressures increased 1.1 per cent in April, at a seasonally adjusted quarterly rate, easing from the previous month’s 1.3 per cent pace of growth and an average of 1.5 per cent since September 2006.
Mr Oster said the decline in the rate of growth was encouraging and brought the annual rate down to 5.1 per cent.
Capacity utilisation inched up to 83.3 per cent from 83.2 per cent in March.
Mr Oster said he expected core inflation to sit below 2.5 per cent by late 2007, with interest rates likely to remain at 6.25 per cent: a reading that wouldn’t be disputed in Martin Place after Friday’s Monetary Policy statement.
…………
Here’s the NAB’s domestic outlook for the economy and interest rates.Compare them with the budget figures.
We still see GDP as increasing by a touch below 3 per cent in 2007 rising to 3¾ per cent in 2007. In financial year terms that equates to GDP growth of a touch above 2½ per cent in 2006/07 and 3½ per cent in 2007/08.
Our aggregate forecasts imply only moderately lower domestic demand in 2007 to 3½ per cent (vis a vis 4 per cent in 2006) – albeit private demand slows to more like 3¼ per cent reflecting the lagged impacts of tighter policy, slower global growth and the drought.
The out year (2008), on the other hand, is likely to be much stronger (growth through the year of nearer 4 per cent for an annual rate of 3¾ per cent) very much driven by the assumed breaking of the drought and a return to stronger growth in the residential construction sector (see chart below – left hand panel).
These higher forecasts mean that employment is now expected to increase a touch stronger (around 2½ per cent) meaning that the unemployment rate is likely to remain around 4¾ per cent over the next year or so.
With commodity prices expected to remain around current levels and the prospect of rate cuts in the US we see little prospect of much fall in the AUD/USD rate till late this year. Thereafter we expect the AUD to track moderately lower to around 77c by late 2008;
Continuing tight labour markets and stronger growth mean there may be more pressure on wages – and indeed there is some sign of higher wages growth in our business survey.
Against that the Survey shows much weaker wages pressures in the retail sector and the overall impact of faster growth is partially mitigated by the higher AUD forecasts.
It also needs to be remembered that our revised forecasts still imply a small but negative output gap through until at least mid 2008. Finally there are also signs that purchase cost inflation has peaked;
Overall, we see core inflation
