Business conditions slipped again in the June quarter with reductions in sales and profitability outweighing improved employment conditions. The quarter was characterised by European financial turbulence, softer equity prices, exchange rate volatility and the flow-through of higher interest rates. Monthly surveys suggest that conditions bottomed out mid-quarter, especially for profitability. Forward orders remained positive and capacity utilisation increased. The survey suggests that demand growth remained solid and employment grew in the June quarter.
Conditions fell in retail, wholesale, transport and recreation, but improved strongly in construction and, to a lesser extent, in manufacturing. Conditions were strongest in mining, where higher export prices were still being absorbed, finance and construction. Conditions weakened in New South Wales, Queensland and South Australia, but improved strongly in Western Australia. The strongest of the major states are now Western Australia and Victoria.
Business confidence declined sharply in the June quarter, although it remains in positive territory. Monthly results indicate that sentiment fell heavily in May during the turbulence on European financial markets and associated declines in Australian equity prices. The decline was broadly based, although mining was particularly affected, probably because of the unpopularity of the RSPT. Confidence is still strongest in mining, manufacturing and finance, and in South Australia, Western Australia and Queensland, and weakest in construction, recreation, retail and wholesale. The quarterly survey predates the change of prime minister and the replacement of the RSPT with a less onerous mining tax.
New data in this Survey suggest that business capital spending plans over the next 12 months were broadly unchanged in the June quarter. Average hours worked have edged higher than the same time last year. Lack of demand as a constraint on output remains important, but the proportion of firms concerned about labour shortages rose for the fourth quarter in a row.
However, cost pressures have risen but are still below average. Retail price inflation has virtually ceased and retailers are struggling with very low profitability. Retail softness may reflect recent interest rare rises, concerns about the implications of European financial turbulence, lower equity prices and the passing of the fiscal stimulus.
Global forecasts have been raised to 4½% in 2010 and 4¼% in 2011, with upgrades to emerging economies offsetting sustained weakness in Europe.
Australian GDP forecasts are now softer in response to the easing in conditions and disturbances during the June quarter: we now expect growth of 2¾% in 2010 and 3½% in 2011, equivalent to 2¼% in 2009 10 and 3% in 2010 11 (the same as the Commonwealth’s July Economic Statement). Unemployment to fall to around 4¾% by end 2010 and 4½% by end 2011.
Exchange rate to reach 90c by end-2010 before edging down. Core inflation (as measured by the RBA’s preferred measures) to be 3% by end 2010, and a touch lower (2¾%) by end 2011.
RBA to wait until late 2010 (possibly November and December) before increasing rates in 25 point moves to 5%, and tightening to 5½% by mid-2011 in response to expected inflation pressures.
