Press Releases

Sydney, April 29, 2008 (ABN Newswire) - Corporate confidence in the future of the economy has again fallen sharply, according to the latest Business Confidence survey from the National Australia Bank.

It's now at lows not seen for seven years, since the nervous days of September 2001.

Concerns about interest rates and the credit crunch were the main factors behind the further slide. Of the 11 sectors surveyed, only three expected a rosier outlook.

According to the National Australia Bank's report business confidence tumbled 10 points for the June 2008 quarter, down to -4. That's 15 points below the mid-2007 figure of 11, and close to lows reached in 2000 and 2001 during the US dotcom collapse and recession and then the bombings on September 11.

The NAB said the survey was of 1700 companies taken during late February and March. That's when the concerns about interest rates and the credit crunch were very high as markets digested the rescue of US investment bank, Bear Stearns.

Conditions in bond and equity markets have improved since then, so it will be of interest to see next month's survey results to see if they reflect an improvement in confidence, or a further fall.

"Confidence has taken a big and unexpected hit but we expect it stabilise some even as business conditions slowdown," said Jeff Oughton, NAB's Head of Australian Economics.

Most of the 11 industries surveyed offered up a bearish assessment of the current quarter, with finance and real estate companies leading the pessimism. Mining companies stood out for their optimism, as you'd expect given the continuing China boom and the expected surge in coal and iron ore prices over the next few months.

Large mining companies showed a 24 point jump in confidence, by far the largest.
Finance and insurance companies dropped more than 15 points from the previous quarter while as expected, the property sector lost confidence (down 15 points) on the rising local interest rates, the credit crunch and tightening loan standards here and overseas.

Besides mining, only small transportation businesses and larger business service companies had hopes for an improved quarter.

Mr Oughton said the financial shock of the subprime crisis and credit crunch along with the unforseen jump in interest rates and currency value hit the financial sector hard. Consecutive rates rises in February and March have taken the cash rate to a near 12-year high of 7.25%.

"Business confidence has fallen to a broadly similar negative level across all business segments – both SMEs (small, medium & emerging) and larger businesses.

"By segment/annual sales turnover, confidence is only a bit higher for SMEs with annual sales turnover of $3-5 million (at nil for Q2). On the other hand, SMEs as a whole have reported a slightly bigger loss of confidence for the next quarter than bigger businesses."

"Amongst both bigger business and SMEs, confidence fell markedly across most sectors with the notable exception of mining with the latter buoyed by further rises in global commodity prices. For both SMEs and bigger businesses, confidence of the finance and insurance sector as well as property services recorded double-digit falls to be amongst the lowest of any sectors reflecting the global financial market stress.

"A significant loss of confidence was also reported by smaller manufacturers as well as all wholesalers and retailers. Only mining has recorded higher confidence during the past year," the NAB said.

The news comes at the start of a week vital for the economy here and in the US (and global confidence as well).

The US Federal Reserve has a two-day meeting which could see rates cut by 0.25% for the Federal Funds Rate early Thursday morning, leaving it at 2%, with the Fed signalling that it had finished rating cutting for the time being after markets stabilised in the wake of the Bear Stearns rescue last month.

The first of three readings on US first quarter economic growth will also be out earlier on Thursday morning, our time, US jobs and unemployment numbers are out Friday night, our time, and the latest survey of US house prices will be out overnight Tuesday when the Standard & Poor's Case/Schiller index for February is released. It's already showing a 10% fall in 2007 and will show a large fall this week.

In Australia we have building approvals for March on Thursday and retail sales for the same month on Friday. Both are expected to show sharp falls in activity after the sluggish months of January and February.

If down, they will sit well with the sharp fall in the latest NAB survey.

Mr Oughton said as long as the financial turmoil goes away, he expected growth will be sustained and confidence will eventually stabilise.

Meanwhile the Australian home building industry has forecast weak short-term conditions, thanks to higher interest rates, wages and the rising prices of construction materials.

Increases in borrowing costs and building outlays had led to a wider gap between the number of new houses needed and how many were being built, the Housing Industry of Australia (HIA) said in its March quarter HIA National Outlook report.

HIA chief economist Harley Dale said it was improbable that the new home building cycle across Australian would turn up before 2009-10.

"Australia is enjoying its 17th year of economic expansion at the same time as the weakness in new home building looks set to last for an unprecedented five consecutive years," Mr Dale said in the report.

New housing starts were forecast to be flat over the next 12 months, but policies should be introduced to make it rise sooner as the last positive building cycle ended in 2003-4, he said.

"The lack of new housing supply is driving up rents and is holding up real estate prices for existing housing stock.

"The chronic shortage of housing stock is generating a real social problem via a dislocating impact on lower income households.

"Policies on the table need to translate into activity on building sites, in a matter of months not a matter of years," Mr Dale said.

But he said the renovations sector is strong, the opposite of building new homes. It's something that happens when demand for new and existing homes is weak, thanks mostly to higher interest rates crimping demand and prices.

The HIA said total investment in renovations is expected to grow 4% in the June financial year, to top the $30 billion mark for the first time.

"In part, the health of renovations is fuelled by astronomical transaction charges on property coupled with taxes and charges on new residential dwellings," Mr Dale said.

Fewer available houses would stop current prices from plummeting, while the recent interest rate rises would stop existing house prices rising too much, Mr Dale said.

Brokers Goldman Sachs JBWere said yesterday in a comment on the March building approvals, due out later this week, that it didn't see any signs pf improvement this year.

"Looking further ahead, we have generally become more bearish on the outlook for residential construction and do not anticipate a meaningful lift in activity this year," the comment said.

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