The National Australia Bank has warned that the Reserve Bank has to avoid too hard a landing of the economy. In the commentary accompanying the NAB’s July survey of business conditions, it said “The focus for the RBA must now be changed to preventing an overly hard landing.”

The bank said that despite another downturn in business conditions in July, it had left its Australian and global economic forecasts unchanged, but it still sees the RBA cutting sharply and deeply over the next year.

We see the RBA as cutting by at least 50 points by end 2008 – with the timing data dependent but could begin as early as September. Overall, we still see at least 125 points of cuts in the current cycle — with a cash rate to 6% by mid 2009.

Australian GDP forecasts are unchanged at 2.75% in 2008 and 2.25% 2009. Excluding the farm and mining sectors, the 2009 forecasts equate to growth of only 1%. This reflects both global factors and the lagged impact of the current very tight financial conditions. Also relevant is the much sharper than expected slowing that has already occurred. Indeed, the latter points to downside risks to the current forecasts unless policy is significantly eased.

Our core inflation forecasts are unchanged — at around 4% through most of 2008 and not back in the RBA target range till mid/ late 2009.

The RBA cut growth forecasts for this year to 2% (with non-farm growth figure of 1.75, still more optimistic than the NAB). The NAB said its July survey of business showed conditions fell by 5 points to an index of -5 in July:

25 points lower than its recent peak in October 2007, a rate of slowing now faster than that leading into the post Olympic 2000 slowdown (and not seen since the early 1990s).

Profits fell a further 10 points to -9 index points, while employment was negative for the second month in a row — a fall of 3 to -5 points. Trading also fell 3 to -2 index points. All these measures are at their lowest readings since late 2001.

The fall in conditions was very broadly based — with all sectors falling, except personal and recreational services which was up marginally but remains at very low levels. Particularly large falls recently have been in mining, manufacturing and wholesaling. Confidence was marginally better in transport and personal & recreational services but weaker in mining, finance & business services, construction and wholesaling.

Overall, the Survey suggests domestic demand growth continues to slow sharply — to around 1% at an annualised rate.

Peter Fray

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