Australian retail surge key factor in growth

SYDNEY - Australian business conditions softened only slightly in March, suggesting the economy was still travelling at a healthy clip, while business confidence showed a modest improvement, a leading survey shows.

The National Australia Bank's March business conditions index declined to plus five points from plus seven points, a reading equating to annual growth above four per cent.

Its business confidence index increased to plus 14.8 from 13 points in February with most sectors reporting improvements except mining and wholesaling, which came off recent highs.

"It is clear the retail sector is leading the growth surge. Manufacturing is also continuing to strengthen," the bank's chief economist, Alan Oster, said.

"Against that, the survey is increasingly pointing to a slowing in residential construction. This was particularly evident in the fall in construction forward orders, but also in actual activity levels."

And as had been noted for some time, Oster said sectors exposed to global forces continued to face tough and declining conditions, despite signs the global economy, especially in the US, was improving.

All sub-components of the business conditions index declined slightly with trading down three points, profitability down one and employment two.

Forward orders were much lower, down seven points to a rating of plus one, driven mainly by construction and retail/wholesale orders.

Stocks increased by five points to plus seven points and capacity utilisation increased marginally to 80.7 per cent from 80.3 per cent.

Wage pressures remained subdued, rising marginally by 0.6 per cent on a quarterly basis. Prices overall increased to 0.7 per cent on a quarterly basis from 0.3 per cent.

"Putting all of this together, we see no reason to change our expectation that Australian GDP could increase by around 3.75 per cent in 2002, which includes a relatively slower second half of the year as the full impact of the housing downturn bites," Oster said.

"It is clear that we are very near to the beginning of the tightening cycle."

The timing depended on inflation, the domestic labour market and growth prospects internationally.

The bank expects the first upward adjustment in official interest rates around mid-year, lifting the 4.25 per cent cash rate to around 5 per cent by December.