As expected business confidence fell in December as concern about the floods in Queensland pushed it to its first negative reading in more than 18 months.
Business conditions also fell sharply in Queensland in response to the floods.
But outside Queensland, business conditions were mostly steady, according to the National Australia Bank’s latest survey of business confidence and conditions. They survey was conducted during the flooding in Queensland earlier this month.
The NAB said that its business confidence index dropped to -3 in December from +6 in November, the first negative reading since April 2009.
The impact of the floods (not only in Queensland), saw the bank cut its 2011 growth estimates for the Australian economy.
NAB now sees Australia’s economic growth at 2.4% this year down from the previous 3.6% annual rate, “reflecting the impact of Queensland, Victorian and Tasmanian floods”.
The NAB said mining, transport, tourism and farming would all be hit by the floods.
"Our impact (0.9%) in 2010/11 is larger than Commonwealth’s (0.5%)," the bank said.
First quarter weakness is likely to be followed by investment boost as infrastructure is repaired giving growth of 3.5% through 2011 (was 4%) and 3.9% in 2012.
NAB chief economist Alan Oster said, "Business confidence in Queensland declined sharply, reflecting the prospective impacts on mining, transport, agriculture and tourism.
"In Queensland, the inundation closed mines, destroyed homes and damaged roads, knocking confidence down 25 points in that state in December to minus-21, the lowest since February 2009.
"In addition to those regions, northern New South Wales and Western Australia all experienced flooding in recent weeks, which has damaged key roads and other infrastructure, disrupted business, and ruined homes.
"Business conditions in Queensland dropped 12 points to minus-10 in December, with expectations of further falls to come.
"Conditions nationally, though, improved to 6 in December from 4 in November, even as the Queensland grappled with the floods.
“The poor confidence reading and the extent of the dislocation caused by the floods points to the likelihood of very weak business conditions in Queensland in January
“There may also be downward pressure on conditions in Victoria where severe regional flooding also occurred,” said Mr.Oster
The NAB said in the survey that business confidence in Queensland declined sharply, reflecting the prospective impacts on mining, transport, agriculture and tourism.
Queensland conditions also declined significantly but the NAB (and business) expect a further substantial deterioration in the January survey.
Outside Queensland, conditions improved modestly and while confidence fell, it remains marginally positive.
Trading conditions picked up, especially for retailers.
"Trading, profitability and employment all improved sharply in seasonally adjusted terms," the bank said.
"Caution needs to be exercised because the seasonal adjustment to retail conditions data is particularly large in December.
"However, retail capacity utilisation, which tends not to have a strong December effect, also rose sharply.
"There were also signs that household goods and car retailing were unusually strong. Note that the ABS measure of retail trade includes cafes, restaurants and take-away food that are defined as part of recreation & personal services in the NAB survey.
"Despite deteriorating sentiment, business conditions edged down only marginally in mining, remaining in positive territory.
"Conditions in transport & utilities declined but remained firmly positive.
"The impact of coal mine and railway closures in Queensland may not be felt in the conditions index for mining and transport & utilities until the January survey.
"Conditions improved in manufacturing and construction in December, although confidence declined in both sectors," the bank said.
Although forward orders remain negative and stocks are weak, capacity utilisation nationally rose strongly, despite large falls in Queensland.
The survey is consistent with domestic demand running at an annual rate of around 3% in Q4 – implying annualised growth in non-farm GDP near 2½%.
But the Survey implies much slower activity in Q1 2011.
Price and cost pressures eased moderately.
In terms of interest rates, the NAB said the Reserve Bank "will look through any temporary flood effects on food prices.
"Next hike to 5% still expected in May, but may be postponed because of flood disruption, with peak of 5.25% by August 2011.”
The bank said the RBA will be watching cost pressures during reconstruction phase, and it expects core inflation around 2.75% through to end 2012, which is a touch higher than what it was in the December quarter at 2.25%.
The survey summarised was:
Business conditions, nationally, improved in December (by 2 points) to +6 points, in line with its long-term average. All components improved, especially trading conditions (up 5 points) to +9 points. Profitability and employment also rose, but more modestly (both up a point).
Business confidence fell sharply (by 9 points) to -3 points – the first negative reading since April 2009. Excluding Queensland, the decline was still a marked 6 points to +1 points. The Queensland floods appear to have had a major effect on sentiment (see Focus on Queensland).
Business conditions improved sharply in retail and finance/ busines
