Rate Rise, Market Woes Batter Conditions

AUSTRALIAN business conditions have weakened to their worst in eight months, following the recent interest rate rise and financial market volatility, a survey shows.

Wages costs appear to have moderated for now, but another interest rate rise soon is still possible in an environment of buoyant domestic demand.

Meanwhile, a stronger Australian dollar appears to have hurt export sales.

The National Australia Bank monthly business survey, released yesterday, showed conditions slipped 3 index points to 16 points — the worst result since February and the first fall this year.

The mining, wholesale, transport and recreational industries all reported falls, which NAB blamed on higher oil prices.

Meanwhile, the business confidence index slipped 3 index points last month to 7 points, its lowest since January and below its long-term average.

This was the fourth consecutive fall since the business confidence index fell from 14 points in May.

NAB said a Reserve Bank decision in August to raise interest rates by a quarter of a percentage point to 6.5 per cent had dented business confidence.

"Both the recent tightening in monetary policy as well as global financial turbulence have at least temporarily weighed on confidence in the near term, despite continued strength in actual business conditions," the report said.

JPMorgan economist Helen Kevans said the fall in confidence was likely to be temporary.

"It is too early to conclude whether these declines are mainly owing to concerns over the global economic outlook, concerns which probably have since started to subside," she said.

"Domestic conditions generally remain robust. Gross domestic product growth is running well above potential, the labour market remains tight, consumer spending has proved resilient to the RBAs tightening and credit growth has accelerated."

The export sales index fell to minus 3 last month from zero as the Australian dollar recovered in the month to test 18-year highs above US89¢.

The employment index fell 4 points to 6 in September as wages pressures eased.

"Wages pressures appear to have stabilised at a higher rate at least temporarily, following a pick-up in the first half of 2007," NAB said.

"Indeed, higher rates of capacity utilisation and a tight labour market point to the likelihood of renewed wages pressures."

The trading conditions index was steady at 26 points last month while profitability was down 2 index points to 18.

NAB estimated the chance of another interest rate rise by the end of this year at 45 per cent.

"This is a difficult policy assessment environment for the RBA to weigh up," the report said.

"On the one hand the domestic economy remains resilient — albeit with some sign in this survey that activity might be subsiding a touch — inflation may be rising again and pre-election spending initiatives will only add to the demand pressures."

AAP

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