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National's Monthly Business Survey - February 2001 Business Conditions Remain at Recent Lows
Business Confidence Falls Back to Levels of Late 2000
No Sign Yet of an Improvement
Labour Market to Deteriorate
With Growth now likely to be around 1% in 2001 ...
Interest Rates to Fall An Additional 75 points In commenting on the National's latest Monthly Business Survey, Chief Economist, Alan Oster, noted the results for February indicated that: - business conditions improved only very marginally to -12 from the very disappointing -14 recorded in January. To put these results in context, it can be noted that readings for business conditions in the first two months of 2001, are both significantly down on those recorded in the December quarter 2000, and are at the lowest levels since 1992/93 - albeit, as noted last month, they remain significantly above the levels of the early 1990's recession;
- all components of the index (trading, profitability and employment) were marginally off their January lows. In recent months however it has been noticeable that employment conditions have moved down following earlier falls in trading and profitability. Expectations of further employment growth (collected but not normally reported on a monthly basis) point to further significant deterioration in the next 3 months;
- across sectors, very weak business conditions were reported in construction, manufacturing, retail and wholesale. Indeed, recent signs of stabilising in the construction sector have been crushed in this result - with business conditions falling to - 44 (a level similar to that recorded at the bottom of the last recession). Against that, services (especially recreational and personal services) improved and mining reported good conditions;
- forward orders were again very weak - with an index of -10 (albeit marginally off its January low, but well down on the levels reported in late 2000). Stocks were broadly unchanged (an index of +3) with a large run down in construction stocks being offset by significant increases in retail and wholesale stocks. Capacity utilisation was 79.28 marginally up on the very low 78.68 recorded in January;
- labour costs increased by 0.5 percent on a quarterly basis - down from recent readings. Prices, on the other hand, increased by around 0.6 percent overall - with a significant increase in retail prices (1.1 percent on a quarterly basis) being offset by falls in construction related prices;
- business confidence fell back to an index -3 - reversing the surprising and (interest rate related) jump in confidence (index of +8 points) in January and is now back to the very depressed levels of late 2000. The decline in confidence was mainly driven by a deterioration in confidence levels in the construction, retail and wholesale sectors.
While marginally off the January lows, the results of this Survey still make for very concerning reading - especially when put against the National Accounts released last week. While the Survey results were not as weak as the accounts for December, equally the Survey points to a weaker outcome in March than December. Clearly the Survey points to an economy with still disappointing trading and profitability results, falling new orders and a deteriorating labour market. It does however still highlight reasonable conditions in some sectors such as mining and personal and recreational services. Not surprisingly, continuation of these depressed levels of business conditions has again undermined business confidence levels. It is also somewhat concerning that the weakest area of business confidence is now retail. In retail, it is also interesting to note the surprisingly large increase in retail prices - which appear to reflect an attempt to claw back some of the profit squeeze of recent months caused by the falling $A and higher oil prices. Such price increases are unlikely to be sustainable if sales remain subdued. While we do not normally review our growth forecasts until the publication of the full Quarterly Business survey, the latest national accounts together with the National's February Survey have some significant implications for the economic outlook. Unless the Statistician significantly revises up history, and with no fundamental improvement likely in the March quarter, it now looks like growth in Australia in 2001 will be very subdued - around 1 percent (our previous forecasts were around 2-21/2%). That implies a significant deterioration in the labour market in the next six months. It would also imply significant further downward movements in interest rates relative to our previous expectations. We now expect rates to fall by around 75 basis points by mid 2001 (with up to 50 points at the next Board meeting in early April). For more details contact: Alan Oster, Chief Economist (03) 8641 3464
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