The National Australia Bank’s monthly business survey shows a surprisingly confident business sector, despite the volatility seen on local and global markets in the past month and the intensification of the credit crunch into a credit freeze.

The NAB released its September survey this morning and it showed that business conditions rose 2 points to an index of -1 in September, but still 21 points lower than its recent peak in October 2007.

The NAB said business confidence did fall 1 point to -8 points in September, “but in trend term both series were unchanged (at -8 and zero points respectively).

Trading conditions rose 4 points to +1 points, while profits also rose 2 points to -4 index points. Employment, however, fell by 2 points to -2 points (the third minor fall in the last four months) — indicative of a moderate labour shedding process.

For the second month in a row the slight improvement in conditions was not broadly based. Once again there was a sharp improvement in mining while most other sectors were either unchanged or fell slightly. On confidence it was notable that mining confidence fell sharply (as commodity prices fell) while other sectors to experience falls included manufacturing and transport. Against that, confidence improved in retail and to a lesser extent wholesaling

Consistent with a slowing economy capacity utilisation fell by another 0.7 per cent to 81.0 percent – the lowest level since October 2002. Forward orders fell another 1 to -9 points. Both these readings are clearly the lowest since late 2001.

The NAB pointed out that the survey was taken in late September and early October during the turmoil over the US bail out plan and growing lack of bank lending, but before the big 1% rate cut by the Reserve Bank a week ago today. The NAB now believes the RBA will cut rates further to 5% by early next year and with the cash rate falling to a low of 4.5%.

The bank said the survey:

… implies both demand and non-farm GDP in Q3 have fallen to round 2% (annualised).

Global economic growth forecast for GDP for 2009 have been lowered to 2.25% (with USA now at zero) and local GDP cut significantly (to 1.75% in 2009) in light of equity & commodity price falls and lower global growth.

Despite more aggressive (fiscal) policy responses downside risk remain,” the NAB said.