June is shaping up to have been a month when the Australian economy softened.
The latest survey from the National Australia Bank shows business confidence and conditions are now at their lowest since the aftermath of September 11, 2001.
And the bank believes the economy took a further dip downwards last month, something backed by the trio of Performance surveys for services, manufacturing and construction which all showed a contraction last month.
It’s a picture that is looking gloomier: the outlook for the Australian economy is clouding over and the possibility of a bumpy landing can’t be discounted. The Nab sees non farm growth (excluding mining) slowing to only 1.5% annual rate by the end of this year, and just 1.75% in 2009.
That’s very sluggish compared to the 3%-4% annual rates seen in the past year or so.
Even though economists are forecasting a rise of 10,000 in the number of new jobs in June, another loss the size of May’s drop of 19,700 wouldn’t surprise, nor would future news of a slump in retailing after May’s surprise rise.
The ANZ jobs series on Monday also showed lower jobs in both metro newspapers and on line (an outcome supported by two other job surveys).
As well it shows inflation continuing to edge up, driven by higher oil costs; wages remaining steady, but business activity levels are under increasing pressure, especially in the consuming sectors, which is where the Reserve Bank’s attack on inflation is being directed.
Even though the Nab forecasts inflation to rise through the rest of 2008, it expected it to ease during 2009 and doesn’t expect the Reserve Bank to change its stance and lift interest rates.
The Nab believes the next interest rate move will be down next year.
Today we will get an updated reading from the Westpac/Melbourne Institute consumer sentiment survey that is expected to show another sharp fall, but the drop in business confidence and conditions was sharp "and unexpected" according to the Nab.
The Nab said that business conditions deteriorated sharply and unexpectedly in June with a "sustained slowdown in sales and profits begins to slow job gains and lower capacity usage.
"The important macroeconomic message from Nab’s Survey is that conditions across the non-farm business sector as a whole deteriorated unexpectedly and significantly in June and this slowdown in conditions appears to have further to run.
"More specifically the bank said that growth in both sales and profits moderated significantly further in June, jobs were shed for the first time in over six years, capacity utilization stayed lower, while forward orders remained subdued and negative near term confidence turned more pessimistic. Purchase cost pressures intensified and current inflation edged higher.
"Near term negative confidence weakened significantly further & forward orders subdued."
The Survey implies domestic demand up 2.5% to 3% in the year to June; slower than Nab and most forecasts. Economy-wide purchase costs are rising, while current inflation is edging higher.
The Nab said "Business conditions fell by 7 points to an index of nil in June – 20 points lower than its recent peak in October 2007, trading conditions and profits deteriorated by 11 and 4 points, respectively, both to an index point. After a monthly fall of 4 points, employment fell 7 to -2 points – its first negative monthly reading in over six years.
"Conditions were weaker across most industries, while durable retailing & personal & rec. sectors reported poorest conditions. Firms highlight that lower customer confidence & higher interest rates are main drivers of weaker sales.
"Confidence down by 5 points to -9 index points in June – the lowest level since the temporary fall associated with September 11, 2001. Confidence was lower in most sectors to remain at poor levels except in mining. Forward orders remained negative at -3 points – with weak retail orders and to a lesser extent elsewhere partly offset by strong mining orders.
"Reflecting these sustained weaker results, capacity utilisation is now much lower than in early 2008/late 2007 – albeit broadly unchanged at 82.5% in June.
"Annual wages growth was 5.3% in June – largely unchanged during 2008 to date. In contrast, purchase costs continued to accelerate to be up 5.2% during 07/08.
“Economy-wide & retail prices have also picked up – albeit to a lesser extent than costs – to be both up at about 3% during 07/08. Nab’s Survey measure of retail prices and modelling point to another relatively high core CPI outcome of 0.9% in Q2." (To the end of June).
"Core inflation forecasts are also unchanged – with core inflation remaining around 4% through most of 2008, before easing back into the RBA’s range during 2009.Headline CPI remains higher due to higher oil, food, rent & financial prices.
"The RBA will look thru the adverse near term inflation outlook, but remain alert to any signs of second round effects on wages outcomes. Nab’s medium term forecasts (and judgment that the risks are to the downside) suggest that the RBA will remain on hold at the current tight stance, before lowering the cash rate during 2009."
Nab said it was continuing to forecast slower global growth – up 3.4% in 2008 and 3.1% in 2009.
"Sustained higher oil prices & effects of financial turbulence will continue to slow OECD/industrialised activity during 2008, with only a moderate recovery thereafter, but China is expected to grow relatively strongly.
"Australian GDP forecasts remain unchanged at 2¾% in both 2008 a
