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Business Conditions Unchanged at Recent Lows
Business Confidence Edges Up but Remains Depressed
Labour Market to Deteriorate Further
Growth and Financial Outlook Unchanged...
Official Interest Rates to Fall An Additional 25 points In commenting on the National's latest Monthly Business Survey, Chief Economist, Alan Oster, noted the results for March indicated that: - business conditions remained unchanged, with the index at a disappointing level of -12 points. These results confirm that overall business conditions in the March quarter were significantly down from those recorded in the December quarter. While the results are the weakest since 1992/93, they are broadly consistent with on-going growth rates at around 11/2-2 percent per annum - i.e. while the economy has clearly slowed significantly, the survey is still at levels substantially above those recorded in previous recessions, such as in the early 1990s;
- movements in the components of the index (trading, profitability and employment) were marginal. Trading was a touch higher and profitability a touch lower. The decline of 2 points in employment (from -6 to -8) was the largest movement - and is consistent with survey expectations data pointing to a further deterioration in the labour market over coming months;
- across sectors, extremely poor conditions were reported in both retailing and construction. While reductions in interest rates will ultimately help these sectors, and is already helping confidence (see below), business conditions indices of -30 and -55 respectively underline the degree of stress currently being experienced by these sectors. Other poorer performers in March include manufacturing and wholesale. On the other hand, business conditions appear to have strengthened in the service sectors - especially business, property and financial services;
- forward orders were again weak with an index of -7, but more encouragingly for the second month in a row this index has been less negative than in the previous month. Stocks were run down in March - to an index of -5. This was mainly driven by destocking in the retail, construction and transport sectors. Capacity utilisation also edged lower to 79.1 from 79.3;
- labour costs increased by 0.9 percent on a quarterly basis - up from the previous month (0.5 percent), mainly reflecting increases in labour costs in the services sectors. Price pressures were again stronger than expected with an overall increase of 0.8 percent on a quarterly basis. Once again retail prices were up significantly (1.5 percent on a quarterly basis), as were wholesale prices (2.0 percent);
- business confidence edged up marginally - improving from an index of -3 to +0.6. This mainly reflected improved confidence levels in construction and retail - both of which appear to have been interest rate related.
Overall, while the survey at least did not point to any further deterioration in business conditions in March, it is clear that the March quarter results will be significantly down on those recorded in the December quarter. Business trading and profitability continue at depressed levels and the employment situation is clearly deteriorating. At best the forward orders data might be read as signalling a potential bottoming in growth, but the situation is still clearly "fragile". Once again, business conditions across sectors vary considerably. On the survey readings, construction is clearly in recession and retail is bordering on recession. Easier monetary conditions have given some hope to these sectors but the malaise in current conditions should not be understated. Manufacturing, transport and wholesale are also struggling. Services, on the other hand, are still reporting reasonable conditions and, if anything, appear to have strengthened in March. It is also worth noting that in recent surveys an increasing difference in reported business conditions is emerging according to firm size - i.e. smaller firms are reporting much worse business conditions than large firms. At this stage, it is not clear that a GST related cash flow squeeze is behind that trend - with firms affected pointing mainly to the "lack of demand" as the key factor. This issue will however need to monitored. A detailed review of our forecasts will be published on Tuesday 17 April with the publication of the full Quarterly Business Survey for the March quarter. However on the basis of the March monthly survey we see little reason to change our forecasts of GDP growth of around 1 percent in 2001 (around 2% on a financial year basis). Also we still expect another 25 point reduction in interest rates - most likely in June. For more details contact:
Alan Oster, Chief Economist (03) 8641 3464
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