The Australian economy continues its contraction and there could be worse to come, according to the latest monthly business confidence and conditions survey from the National Australia Bank. Business confidence is at the lowest level since the survey was instituted and growth has drained from the economy as a result. The 3% of rate cuts from the Reserve Bank since September hasn’t changed confidence levels or business expectations. Tomorrow we will find out if they’ve had any impact on consumer confidence. Adding to the gloom was news that Japan’s third-quarter slump was much, much greater than expected — an annual contraction of 1.8% instead of the originally reported 0.4%. Exports and investment continue to fall. It’s against the backdrop of growing domestic and external weakness and Monday’s rotten ANZ jobs survey figures that tonight’s speech in Sydney by Reserve Bank Governor, Glenn Stevens, will be watched carefully for any upgrading of the bank’s view of the current state of the economy. But there was some good news: ABARE (the Federal Government’s commodities forecaster) says our wheat crop won’t change much from the previous forecast of 20 million tonnes this year, even though weather conditions haven’t been as kind as first thought. Wheat exports are expected to be around 12.3 million tonnes, up from 7.5 million a year ago. But the NAB said this morning that business conditions for the non-farm sector fell substantially in November and that there appeared to be “little, if any” real growth in the economy from May to November. The Bank also slashed its growth forecasts for 2009 to a 0.5% rise in GDP over the year and a “recession in the non-farm economy”. The bank said it expected negative growth in three of the four quarters in calendar 2008, which would be a recession, “albeit a relatively mild one.” It was “the weakest actual outcome since late 1992. In seasonally adjusted terms, NAB’s Business Conditions Index fell by -6 index points to -17 points in November, compared to 7 in May and 15 in November 2007. This represents the largest annual fall in conditions since entering the early 1990s recession.” But the NAB expressed surprise at the outlook for the March quarter, where expectations are now below the actual November performance:
Overall, actual conditions are poor and somewhat unexpectedly so — albeit preliminary expectations for the March quarter are now below the actual outcome for November, while confidence edged down to a record low of -30 index points, compared to -24 points in December quarter 1990. Based on historical relationships, overall business conditions appear consistent with annual growth in non-farm GDP below 1%. Put another way, businesses report that there has been little, if any, “real” growth during the past six months to November.
The NAB said the survey revealed that forward orders fell sharply for the second month in a row — down 5 points to -25 index points. “These types of readings were last seen in the full Quarterly Survey in mid 1991” and capacity utilisation also fell sharply — down 1.3 percentage points to 80.6%, “a reading last seen in early 2002.”
The falls in business confidence were very broad based — with all sectors reporting falls but very large falls in retail, wholesale, manufacturing and finance & business services. The only sectors not to report falling conditions were mining and transport. The sharpest falls were again in interest sensitive sectors and finance, property and business services. We now see Australian GDP growth slowing to only 0.5% in 2009 and 1.75% in 2010; For non farm GDP growth essentially stalls (0.1%) in 2009 and only 1.75% in 2010. In three quarters out of four, in 2008/09 the non farm economy is expected to decline. That is clearly a recession — albeit a relatively mild one; For the total economy our forecasts imply financial year growth of 1% in both 2008/09 and 2009/10.
As noted previously the key factors behind these lower growth forecasts are: The further deterioration in the global outlook with its negative impact on: our major trading partners growth; the continued deterioration in business and consumer confidence and asset prices (including the further 20% fall in equity markets over recent months).