Slump in business confidence

Business confidence in June slumped to its lowest level since the September 11 terror attacks in the US. Inflation still seemed to be problem number one as record prices for oil were being obtained and the outlook for the global economy dashed hopes of an upturn in business activity.

The National Australia Bank business confidence index shrank for the sixth consecutive month, contracting 5 index points to -9, down from May's -4 point reading. The drop in confidence hit most sectors except mining, and was pushed lower by weak retail activity.

The result came in well below the zero level, under which the gauge gives a bearish assessment.

Confidence in the business sector is now at its lowest level since September 2001, when the index stood at -15.1. The index peaked in October last year at 19.5 points. The increase of the cash rates by the RBA seems to be working with sales including the housing sector being reduced.

"The slowdown underway gained further momentum in June - importantly, rising spare capacity and higher unemployment - with significant further slowing in prospect," Jeff Oughton, head of NAB economics, said.

"Domestic credit expansion to both households and businesses has weakened significantly and global securities markets remain problematic for most corporate and bank borrowers."

For business owners and consumers alike, the forward looking gauge foreshadows another rough month ahead. But weaker confidence bolsters the view the Reserve Bank, currently holding the cash rate at a 12-year high of 7.25%, won't need to raise rates again to fight inflation.

Inflation currently stands at 4.2%, above the 2%-3% range the RBA prefers.

Yesterday the market predicted a rise of 11 basis points in rates within the next 12 months, on top of the current 7.25% interest rate. Today the expectation fell to a 7 basis point increase, according to Credit Suisse, in a sign of confidence the RBA would not have to act.

Business conditions, which take a reading of current activity, also took a hit, falling 7 index points, to nil, the worst showing since late 2001 after the September 11 attacks.

"Growth in both sales and profits moderated significantly further in June," said Mr Oughton. "Jobs were shed for the first time in over six years, capacity utilisation stayed lower, while forward orders remained subdued and negative near term confidence turned more pessimistic."

"Purchase cost pressures intensified and current inflation edged higher," he said.

Economists weren't surprised by the poor showing in confidence.

"It's pretty much in line with expectations given that towards the end of June we did see renewed volatility in financial markets and also a widening of credit spreads," said JP Morgan economist Helen Kevans.

"It just confirms we're seeing a slowdown in domestic demand that the RBA is hoping will help curb inflation," Ms Kevans. "I think the RBA is firmly on hold for the remainder of the year especially given their statement last week which was very neutral"

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Published on July 7-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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