By Chris Zappone
Business sentiment surged in August as global markets calmed, but conditions for companies remained tough.
National Australia Bank’s business confidence index jumped to 11 in August from 2 in July, rebounding to the highest level since the European debt crisis spooked investors in May and walloped economic growth forecasts around the world.
“Mining confidence may have been affected by concerns about Chinese growth and the initially indeterminate result of the federal election, which failed to provide an immediate assurance that the resource rent tax would be scrapped," said NAB chief economist Alan Oster. “Confidence improved strongly in manufacturing and wholesale but declined in mining and transport."
The federal election in late August cleared up some of the political uncertainty facing companies, although Prime Minister Julia Gillard didn't form a minority government until last week. The election itself was triggered in part by the controversial mining tax proposed by former prime minister Kevin Rudd in May - the same month Europe's sovereign debt market led to plunges in global equities and commodities markets. At the same time, China took measures to restrain growth to sustainable levels - moves which increased fear in the market.
In the past weeks, shares have bounced back, with the benchmark S&P/ASX200 rising above 4600, close to its level before the debt jitters send markets diving in May.
Coinciding with the recent share gains, Australia’s economic outlook has improved. The jobless rate has fallen to 5.1 per cent from 5.3 per cent, while second quarter gross domestic product gathered pace to 1.2 per cent from 0.7 per cent, suggesting the economic expansion is stronger than anticipated in recent months.
Nonetheless, growth in the economy remains uneven two years after the onset of the global financial crisis and the government’s measures to prop up domestic borrowing and spending.
Business conditions stayed subdued at 5 in NAB’s survey, unchanged from July. The reading on business conditions is below the levels seen in the first half of the 2010, as the impact of relatively higher interest rates – at 4.5 per cent – and the removal of the government’s cash stimulus hits consumers and small business alike.
“The survey continues to point to struggling retail and wholesale trade and transport in third quarter,” Mr Oster said.
In trend terms, the mining subsector stood at 32 in August, outpacing transport and utilities at 22. Retail was at minus-8, while construction was at an anaemic 1, NAB said.
Despite the rise in positive monthly confidence and conditions, employment slumped to 3 in August from 7, while trading dropped to 5 from 8 in the same period.
"Slower trading and profitability levels in July appear to have weighed on the NAB employment index in August, although it is still in positive territory," Mr Oster said.
Forward orders, which give a sense of future demand for goods and services, remained weak at minus-6 in August, from minus-8 in July, confirming a “worrying decline,” said Mr Oster.
“Orders were especially weak in retail and wholesale, and in residential construction,” NAB noted. Small business owners have complained in recent months of lacklustre demand despite the health of the overall economy.
Based on the latest NAB surveys, the bank predicts the Reserve Bank will keep rates on hold for the rest of 2010, unless there is a strong quarterly inflation reading at the end of October.
Credit markets are currently tipping a one-in-four chance of a rate rise in October, and betting on an interest rate of 4.75 within a year, according to Credit Suisse.
czappone@fairfax.com.au
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