Monthly Business Survey – December 2011

Confidence up a touch in December, despite global economic worries. Conditions consistent with an economy going sideways – but multi- […]


Confidence up a touch in December, despite global economic worries. Conditions consistent with an economy going sideways – but multi- speed. GDP forecasts lowered & two rate cuts now expected in 2012.

  •  Business confidence strengthened a little in December, although it remained below the series long-run average. Business sentiment over recent months has been seemingly resilient to the weakness in Europe, which has contributed to a slowing in global activity, perhaps reflecting the effects of the RBA’s recent interest rate cuts.
  •  Business conditions were unchanged in December, after edging higher in November, to remain consistent with an economy growing at around trend. While conditions remained fairly soft in December, they continued to hold up in the face of slowing global activity. As for the survey’s other indicators of activity, trading conditions, profitability and stocks all improved in the month, but employment, capacity utilisation and forward orders weakened. Credit demand and capex was also significantly weaker. Nonetheless, the survey’s activity readings over the December quarter are consistent with underlying demand growth of around 31⁄2% and GDP (ex. coal) growth of around 31⁄2- 33⁄4% in the December quarter (6-monthly annualised rate).
  •  Business conditions remained varied across industries but the disparity between the weakest and strongest performing industries narrowed in December. Conditions recovered remarkably in construction and manufacturing, while mining, recreation & personal services and retail conditions weakened. By state, conditions recovered very strongly in SA, which was the equal strongest mainland state with WA, while conditions were poor in Queensland and Victoria.
  •  Labour costs growth softened marginally in December, though remained elevated. Consistent with the soft CPI outcome for the December quarter, final product and retail prices remained subdued in December. Indeed retail prices were unchanged over the quarter.

Implications for NAB forecasts:

  •  While financial markets remain volatile and full of downside risks, the latest economic indicators of global activity have fared better than expected. The US economy has performed well over recent months given the difficult environment, although the Euro-zone appears to have entered recession. Emerging economies are showing clear signs of slowing, with China performing the best in terms of maintaining growth momentum. Overall, we continue to see global growth slowing to 31⁄4% in 2012, a below-trend outcome highly reliant on the emerging economies as the OECD faces a long period of modest growth.
  •  The outlook for the domestic economy remains firm but global uncertainty is not helping hiring and investment intentions. Forward indicators of activity suggest a slightly weaker start to 2012, with labour market conditions weakening in recent months and the expected coal export rebound now seemingly less robust. As a result, our GDP forecast has been lowered to 33⁄4% in 2012 (from 41⁄2%) but is broadly unchanged at 31⁄2% in 2013. Consistent with this, we have softened our core inflation forecasts (ex carbon tax) – we now expect 2.2% over 2011/12, rising to 2.6% over 2012/13. We now see the RBA lowering cash rates twice in 2012. As well as the February cut, weaker near-term demand and price forecasts, together with uncertainty on the extent of bank pass- on given higher funding costs, point to an additional cut in mid 2012 – possibly in August (timing data dependent).

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