Rate cuts no boon to business

by Adam Smith13 Jun 2012

Businesses have yet to benefit from the Reserve Bank’s rate cuts, with business conditions falling to a three-year low in May.

The NAB monthly business survey has shown that both business conditions and confidence fell sharply in May, despite the RBA’s 50bp cut early in the month. NAB chief economist Alan Oster speculated that businesses remained concerned over the future of the Eurozone debt crisis, and the effects of the Federal Government’s budget.

In spite of strong 1.3% GDP growth for the March quarter, Oster said the survey portends poor growth in the months ahead.

“The deterioration in activity was broad based across industries and across trading, profits and especially employment. The significant deterioration in employment, a lagging indicator of demand, suggests the weakness in activity has begun to bite and employers are preparing for a more subdued outlook as forward orders and stocks trend lower, and capacity utilisation remains worryingly low. Overall, the survey implies underlying demand growth in the June quarter may slow to around 3%, while GDP growth may slow to around 2%,” Oster said.

The survey pointed to weakness in “previously strong industries”, such as mining, finance, business and property. Oster claimed the industries were “looking somewhat laggard at present”.

Oster said residential housing had proven a drag on the construction industry, with conditions “worryingly subdued. But interest rate cuts could bolster demand for credit, he said. The proportion of the survey’s respondents indicating a need for credit rose from 31% in April to 53% in May.

The results have seen the bank revise its GDP growth forecasts upward for 2012, but downward for 2013. Oster said the bank now predicted 3.1% growth for 2012, up from 2.75%, and 3.3% growth for 2013, down from 3.6%. He said NAB also expected at least one more 25bp cut from the Reserve Bank, with potential for another 25bp cut “if activity weakens more than we expect”.