NAB Business View

THE BIG PICTURE

US economic growth is expected to continue to slow significantly, reflecting the fundamental stress due to overbuilding in housing as well as negative wealth effects of lower house prices, and the tightening of credit on spending. At the same time, economic conditions are expected to remain favourable in other parts of the world. Importantly for Australia, China will remain very strong and commodity prices, on average, will stay at around record highs.

The US monetary committee has signalled its intent that they will do whatever it takes to avert a major US recession and cut cash rates aggressively, and the USD has fallen significantly.

LOOKING LOCALLY

The outlook for Australia is for sustained economic growth, despite the potential for some temporary loss of confidence and increased interest and exchange rate risk in the near term. Both small and medium businesses as well as corporates surveyed by NAB highlight that conditions remained relatively strong following the recent turbulence. Looking further forward, only 3 per cent of both SMEs and corporates expect conditions to deteriorate significantly during the next year. The vast majority are more optimistic, expecting a sustained and improved performance.

After raising cash rates in early August, the Reserve Bank is likely to continue to raise cash rates. Only bad news about the global economy and/or renewed financial instability would keep the RBA on hold.

EYE ON THE DRIVERS

Some key economic drivers likely to impact businesses include:

sustained strength in domestic demand. A number of macroeconomic drivers are expected to maintain real spending growth at about trend or longer term average outcomes for Australia. Consumption growth is expected to be a bit below average and new dwelling investment is likely to continue to lag during 2007/08. In contrast, both business and public investment will sustain above average strength due to high returns and limited spare capacity.
an improved export performance following increased resource investment, yet weak rural exports and activity due to poor seasonal conditions.
input price pressures. Commodity and energy prices are expected to remain around record levels.
a tight labour market with unemployment rates around 30-year lows. Businesses will continue to have difficulties retaining/ finding suitable labour as well as increased wage pressures. Flexible arrangements and innovation will be actively pursued.

STRESS TESTING

Finally, business will be wise to stress test for a United States “hard landing” spilling over around the world. In NAB’s view, this worst-case scenario is unlikely and a strong business environment continues to lie ahead. It should also check for the impact of significantly higher interest and exchange rates.

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Jeff Oughton is NAB’s Senior Australian Economist.

The vast majority are more optimistic, expecting a sustained and improved performance.