Ahead of tomorrow’s important consumer inflation figures, the National Australia Bank’s quarterly business survey shows a broader improvement in confidence, expectations and conditions.

The bank’s previous monthly surveys have shown business confidence and conditions rising strongly and today the bank said that third-quarter business confidence “jumped sharply (up 20 points) to levels last seen in early 2002. Business conditions also significantly better (up 14 points) in Q3 with better outcomes across trading and profits (back to Q1 2008 levels) and to a lesser extent employment (Q3 2008).”

That was sort of known from the monthlies, but NAB said the quarterly survey “points to a significant jump in both near and long-term business expectations”.

We have seen the likes of Woolworths, Coles, JB Hi-Fi and Harvey Norman report decent rises in sales growth on a comparable store basis (meaning sales grew over the 12 months based on the same number of stores).

But the stronger dollar is emerging as a big issue for many companies with offshore operations, or facing import competition, while it will continue to benefit retailers and importer/wholesalers.

In fact, the NAB in its quarterly survey, forecast the dollar hitting 97 US cents by year’s end and hitting parity during 2010. It saw the dollar helping cut inflation to 2% next year.

As a broad statement, profits and trading conditions in Q3 are similar to those reported in Q1 2008, while employment is approaching levels indicating little further reduction in employment (be it via heads or hours),” the NAB said in its detailed commentary.

What the recent monthly surveys highlight — that is not so evident in the quarterly survey — is that confidence, having run very much ahead of outcomes, is starting to ease back, with a commensurate weakening in profits and sales (especially in discretionary spending sectors). Against that, in the most recent monthly surveys the labour market has shown surprising strength.

Nevertheless, from a longer run perspective, the quarterly readings reiterate the point that demand growth continues at relatively strong rates in Q3 — indeed longer run relationships suggest annualised growth over the last six months somewhere between 3-4%

The NAB said that in marked contrast for the confidence levels, business investment intentions “remain very subdued — consistent with little real increase in capital spending over the next year.”

The bank said forward orders also improved significantly — “consistent with continuing strong demand in Q3. Hours worked stabilised in Q3, but are still down about 2% on this time last year. Availability of suitable labour tightened marginally (26 to 32 points) but is still at historically very low levels (64 points this time last year).”

“Capacity utilisation edged higher to 80.5% (up 0.4 points) but is still relatively low. Wage pressures remain subdued as purchase costs and economy wide price pressures slow sharply. Retail inflation, is finally showing signs of slower growth (reflecting the higher AUD).”

The NAB didn’t shift its Australian GDP forecasts from a half a per cent rise this year and 2% in 2010.

“That implies a relatively flat second half 2009 as policy stimulus peak passes and a return to near trend growth (about 3%) during 2010. Unemployment peak unchanged at 6.7% in mid 2010.”

The NAB said the Reserve Bank will “continue increasing rates in 25-point moves (albeit a 50-point move is not impossible) to 4.5% by early (March) 2010, before pausing. Rates to reach 4.75% by late 2010, and 5.5% in 2011.”

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Peter Fray
Peter Fray
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