As was probably expected, Australian business confidence fell sharply in May, down for a third successive month while business conditions were mixed to weaker.  It was a combination of the offshore doubts and falling commodity prices and the Australian dollar that hit market confidence, gained headlines, as did the brawl over the resources tax and a general sense of change in the economic climate.

The fall, seen in the latest business survey from the National Australia Bank, will no doubt be repeated in the May consumer sentiment survey to be released tomorrow by Westpac and the Melbourne Institute.

The rival consumer sentiment survey from the Morgan polling organisation has already revealed a sharp fall in sentiment.

But the news on confidence and conditions was confused somewhat; NAB said while confidence was down in mining, conditions had improved in the same sector, for example.

Today, the NAB said the fall in confidence was especially evident in mining, wholesale and manufacturing. “Global financial market instability and sharp declines in the AUD and equity prices were probably contributing factors,” the NAB reported.

The survey revealed that despite the fall, “confidence was strongest in manufacturing, followed by finance, business and property services. Confidence was weakest in transport, recreation and personal services and wholesale. Confidence levels across industries are now much more uniform than in the recent past.”

In contrast, business conditions across industries were quite mixed.

“Mining, construction and transport reported the strongest conditions, but conditions were very weak in retail. Conditions improved strongly in mining (particularly profitability, possibly reflecting higher contract prices for commodities) and construction (across all three components). Conditions in transport also improved solidly. However, conditions declined in recreation and personal services, finance, business and property services, and wholesale.

“Business confidence fell for the third month in a row and, at +5 index points, is now below both its long-run average (+7 index points) and the business conditions index. Confidence fell sharply in mining, presumably partly in response to the announcement of the resource super profits tax), wholesale and manufacturing. The tourism-exposed recreation and personal services and transport sectors declined further: although the $A declined, financial market instability may have been a concern.

“Business conditions eased for the second successive month with the overall index down to +6 index points (equal to its long-run average). Most of the fall was accounted for by declining profitability (down 6 points). Employment fell by 1 point and trading conditions actually rose marginally (1 point).”

As a result the NAB has cut its Australian economic forecasts, “reflecting consumer weakness, lower equity and commodity prices, weaker forecasts for public final demand and soft survey results.

“GDP growth now expected to be 2.75% in 2010 (was 3.5%) and 3.5% in 2011 (was 4.25%). Momentum from higher terms of trade delayed. Unemployment to edge just below 5% in late 2010 and 4.5% by late 2011.”

The NAB says the RBA will now delay interest rate rises “until late 2010, then two rises to 5% by end of year. For 2011 we still see 6% as the rate peak. Inflation at 2.75% by the end of this year and unchanged in 2011”.

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Peter Fray
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