Business confidence improved somewhat in December, helped by one-off payouts from the government's stimulus package, but most likely not enough to prevent Australia from slipping into a recession.
National Australia Bank's index of business sentiment firmed to minus-20 points in December from a record low of minus-29.9 in November, keeping the indicator at lows last seen in the recession of 1990-91. A negative reading indicates that pessimists outnumber optimists.
The negative monthly reading marked a full year of monthly contractions and underscored the scale of the slump bogging down Australia's economy.
Business conditions, a gauge of the current trading environment, improved to minus-6 in December from minus-17 in November, putting the figure back to levels from the middle of last year.
"The critical question is whether the December reading represents a turning point from overly pessimistic recent readings - especially for business confidence, which is still around levels last seen at the bottom of the 1990-91 recession - or a temporary bounce that is unlikely to be sustained,'' said NAB group chief economist Alan Oster in a statement.
"Unfortunately there is much in the survey to point to the latter outcome - or at least that is the way business is positioning themselves.''
NAB said the Federal Government's $10.4 billion fiscal stimulus package, the bulk of which was paid out to families and pensioners in December, may be the force behind the uptick in the reading.
GDP forecast slashed
On the back of the persistently weak business confidence and condition figures, NAB lowered its gross domestic product growth forecast for 2009 to minus-0.25% from a previously expected 0.5% gain.
"Despite avoiding the worst of global carnage in late 2008, Australian GDP forecasts have been cut significantly in light of global developments, notwithstanding aggressive policy responses,'' Mr Oster said.
Although Mr Oster is predicting a "relatively mild Australian recession'', compared to around 2% drops in GDP growth in other industrialised economies, "it needs to be stressed that we see no fast recovery in Australian activity.''
"That is, the path of growth is more U than V shaped - with recovery not really getting underway till 2010.''
Even when the economy gets back on track for growth, the bank has scaled back expectations in 2010 from an expansion of 1% from 1.75%, the bank said, which has forecast the cash rate falling to 3%.
Rate cuts ahead
Analysts are expecting the Reserve Bank to continue cutting interest rates in an effort to prop up the sagging Australian economy.
A consensus of economists is predicting a 0.5 percentage point cut to the current cash rate of 4.25% when the Reserve Board meets on February 3.
The RBA slashed its interest rates three full percentage points in the last four months of 2009, in an effort to spur growth and keep the economy expanding through a prolonged period of global recession.
NAB sees steeper cuts ahead based on an unemployment rate forecast to hit 7% in 2010, from 4.5% in its latest reading
"We still expect the RBA to cut to 3% by March 2009, but rising unemployment forces a further 50 point cut in the third quarter of 2009,'' said Mr Oster.
NAB is only the latest bank to pare back GDP growth expectations triggered by drops in housing approvals, a halving of the trade surplus and a shift from full-time to part-time positions in the labour market.
Retail conditions jumped
In further readings from its monthly business survey, retail and wholesale conditions got a boost, surging 35% and 26% respectively in December, NAB said, while finance property, business services and personal also benefited.
However, unemployment and forward orders didn't budge from levels last seen in 1991. The employment reading remained at minus-17 points in December, where it had been the month before.
Forward orders gained only 1 index point in December to minus-24 points.
czappone@fairfax.com.au
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