Australian business in doldrums, says survey

Conditions for Australian businesses are deteriorating with a survey showing a sharp slowdown in the first quarter of the year and the distant possibility that the Reserve Bank of Australia may have to cut rates in 2006.

The National Australia Bank March business conditions index has fallen to seven points in March from 10 points in February, signalling a greater proportion of businesses are describing conditions as less than good.

The business confidence index, seasonally adjusted, has fallen to 4.3 points in March -- the lowest level of confidence since May 2003.

This compares to 4.5 points in February and 21 points in January -- indicating a sharp deterioration since the beginning of the year.

The survey signals growth in domestic demand is around four to five per cent in real terms.

"The trend slowing in business conditions, first tentatively identified in late 2004, has continued through the first quarter of 2005," said chief economist Alan Oster.

"...it is increasingly clear in seasonally adjusted terms that a real slowdown in the economy is underway and continuing."

Mr Oster said forward orders have moved down sharply and inventories appear to be rising involuntarily.

"As has been the case for sometime, export performance remains weak, albeit the level of exports was broadly unchanged in March," Mr Oster said.

Mr Oster said the the overall level of capacity utilisation in March -- after allowing for seasonal influences - was unchanged at the lower levels since late 2004.

"That said, it appears that business investment may have begun to weaken with a relatively low reading reported for the second month in a row," he said.

The slowing in overall business conditions in recent months continues to be driven by the cyclically sensitive sectors, he said.

"Thus, much weaker readings for business conditions continue to be reported in the retail, wholesale manufacturing and transport sectors.

"Against that, mining continues to boom, while most service sectors including business, finance, personal and recreational continue to report robust levels of business conditions."

Retail prices were also more subdued in the March quarter.

"This is a favourable signal of underlying consumer inflation ahead of the Consumer Price Index (CPI) data due in late April," said Mr Oster.

"It is clear that the domestic economy has progressively slowed through the first three months of 2005.

"Further, there is growing evidence via lower new orders, rising stocks and falling confidence, to expect that trend will continue and in turn will increasingly show up in lower levels of capacity utilisation and higher levels of unemployment."

Mr Oster said there was, however, no reason to change the bank's economic growth forecasts for 2005 and 2005/06 of two and 2.5 per cent respectively.

And he also argued against the need for further interest rate hikes, saying the RBA's surprise decision to stay its hand in April meant that the central bank has avoided having to reverse that rate hike later in the year.

"Given the surprise of 'no increase' last week -- a decision we support - National now expects the RBA to be on hold for the rest of 2005.

"That said, in the near term, given the prospects of increasing inflation, the RBA's bias for cash rates will clearly still be upward.

"However, it will now probably require data surprises on the upside to convert that bias into action."

Mr Oster said the RBA will need to cut rates in early 2006.

"It is likely that, after a period of steady cash rates, the RBA will need to cut rates in early 2006, as slower growth is sustained and the level of unemployment rises to around 6.0 per cent."

- AAP