Global jitters jolt confidence. But could have been worse given global turmoil. Business conditions only a touch weaker – but with further restructuring evident in a widening of the multi-speed economy.

•  Business confidence dropped sharply in August, with heightened global uncertainty, large falls in equity markets and the fear of debt market contagion. Confidence deteriorated across all industries, except recreation & personal services and construction. The largest fall in confidence was in finance/ business/property, reflecting recent volatility in equity markets. That said confidence levels remain significantly above GFC or recessionary lows. Clearly, much depends on how activity holds up.
•  On that front, business conditions in August edged down, but only marginally. Forward orders remained around current (depressed) levels and there was little change in capacity utilisation. Overall, the Survey’s activity readings would be broadly consistent with a lowering in underlying demand in the September quarter to around 23⁄4% (at an annualised rate) and GDP (ex coal) of 21⁄2%.
•  The multi-speed nature of the Australian economy was again highlighted in the Survey. Manufacturing, retail, wholesale and construction conditions remained very weak. Indeed manufacturing conditions continued to decline sharply and there was significant labour shedding in that sector (employment index -25 points). Against that, mining and the service sectors generally remained strong. Recreation & personal services also strengthened considerably (now the strongest sector).
•  Labour costs growth remained firm in the month, after rising solidly in July. Final product prices rose modestly, and retail price growth was soft, after falling sharply in the previous month.

Implications for NAB forecasts:

•  The global economic outlook has been clouded by a series of disappointing US and Western Europe economic indicators, big falls in equity prices and political obstacles in the US and Euro-zone. However, commodity prices have remained high, pointing to still solid global demand. Although a global slowdown is synchronised across most regions, the outlook for China and India is still for strong growth. Our global forecasts are for very weak growth in the developed economies combined with still quite rapid expansion in the emerging economies, implying trend growth in 2012 and 2013.
•  Australian growth forecasts little changed, but unemployment rate marginally higher – as restructuring hurts near term employment. GDP growth 1.9% in 2011 (up a touch given revised history in National Accounts), rising to 4.1% in 2012 (3.6% in 2011/12, 3.3% in 2012/13). Core inflation (ex carbon) to exceed 3% by mid-2013. The RBA to be on hold for a considerable period – with a final 25bp rise in current cash rate cycle expected in mid-2012.

For further analysis download the full report.

• Monthly Business Survey – August 2011 (PDF, 284Kb)