Confidence falls to lowest levels in 5yrs

By: Chris Smith

The latest ACCI-Westpac Survey of Industrial Trends reveals a further decline of general business confidence to its lowest level since

The latest ACCI-Westpac Survey of Industrial Trends reveals a further decline of general business confidence to its lowest level since the March quarter 2003.

Domestic demand has been slowing amidst continuing strong cost pressures.

The net production indicator is well down but, largely reflecting seasonal factors, predictions for the next three months are much stronger. Capacity utilisation has eased marginally but remains historically high.

Reflecting lower business confidence, a decline in profit expectations and strong cost pressures, investment projections for both plant and equipment and buildings have turned marginally negative.

Average unit costs have continued to rise strongly. While below projections, average selling prices also rose strongly. Further price rises are predicted. Despite being able to pass on some cost increases, manufacturers' profit expectations have fallen to their lowest level in eight years.

Greg Evans, Director of Industry Policy and Economics, Australian Chamber of Commerce and Industry, commented:

"The September quarter 2008 Survey indicates a continuing deceleration of domestic economic activity. While continuing to grow, the Australian economy is slowing down. The outlook for jobs growth has softened. Capital expenditure projections for plant and equipment and buildings and structures have also declined, turning marginally negative, ACCI Director of Industry Policy and Economics Greg Evans says.

"At the same time, cost pressures have remained very strong. As manufacturers have been able to pass on only some of the rising costs, their profit margins continue to remain under very intense pressure. We still consider a strong case exists for a rate reduction in October under the weight of further business evidence of the slowing domestic economy.

"The impact of international financial instability on global economic growth reinforces the need for this position."

Westpac’s Global Head of Economics Bill Evans says some consolation can be taken that levels are still performing better than the two previous slowdowns in the mid 1990's and 2001.

"The most important aspect of the Survey is the sharp fall in the Westpac–ACCI Labour Market Composite Index. That is consistent with a number of other lead indicators of employment conditions that are pointing to a substantial slowdown in employment growth. The Reserve Bank is also aware of these trends pointing to evidence of a weakening employment environment in its latest Board meeting minutes," Evans says.

He also expects the RBA to cut rates for a second consecutive month on the back on the current turbulence in global financial markets.

"Until recently the Survey emphasised that labour shortages dominated finance as a constraint on companies. This survey shows that companies now assess finance being harder to get as at an extreme compared to labour shortages where there has been a significant easing. That rebalancing is entirely consistent with the Bank moving from a tightening policy stance to its current easing approach".

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