On the eve of the Federal Budget, there seems to have been a steadying in business conditions, according to the latest monthly survey from the National Australia Bank.

In fact, there was a noticeable steadying in April with the level of business confidence (a separate measure) also steadying and showing some strength. The NAB said all components of business confidence rose, including forward orders and employment, which still remains weak.

Coming on the eve of the 2009-10 Budget, when there has been a lot of talk about recession, rising unemployment and a huge budget deficit, the survey results are something of a surprise.

They continue the better tone that started with last week’s retail sales figures, building approvals and then, the rubbery employment figures for April. The Reserve Bank revealed as much in its new lowered growth forecasts: a 1.5% contraction in the year to June and 1% for calendar 2009, the same as the NAB’s.

The NAB said that the survey results were “consistent with (possibly temporary) moderate growth in demand in early Q2 2009”. That would mean the economy could have already bounced from the slowdown in the March quarter.

Going into the Budget we have also maintained our Australian GDP forecasts for 2009 at -1% and +0.9% in 2010. In financial year terms, that implies +0.25% in 2008/09 and –0.50% in 2009/10.

These forecasts reflect the poor start to 2009, together with weaker exports and business investment given the global outlook. The extent of recent wealth destruction is also likely to see very low, if any, growth in consumption.

The NAB said its forecasts saw private demand falling by -2.25% this year, only partly offset by increased public demand of around 5% — including further fiscal spending in the upcoming Federal Budget of around $15 billion, “bringing the deficit to between $65 bn in 2009/10 — depending on the starting point.”

“We still see unemployment reaching 6.75% by end 2009 and around 8% by late 2010. The RBA in data-watching mode having delivered the bulk of the emergency cuts. Cuts going forward will be data dependent and likely to be delivered in 25 point moves.”

The NAB said it now saw the Reserve Bank less likely to cut interest rates “aggressively”.

“We now see the bottom at 2.5% by late 2009. But subject to the Budget this raises downside risks to growth,” the bank said.

The NAB reported that “Business conditions rose a significant 7 points to an overall reading of -10 index points — returning the index back to levels reported in late 2008 and early 2009. As such, the trend decline in conditions has at least temporarily stabilised.”

It said the survey showed improvement in all components of business conditions: “Trading increased strongly — up 7 points to an overall reading of -3 index points — while profits saw a more moderate improvement — up 2 to -10 index points. After very large falls recently, employment bounced 11 points to a still very weak -18 points.”

Business confidence remained weaker than business conditions, but even then there was a noticeable improvement, down a point to -14 points.

“That said, confidence has stabilised at levels significantly greater from the excessively negative reading of early 2009 when fear of global collapses reigned.”

Peter Fray

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