Slowdown May Lead To Rate Cut: Survey

The Age

Wednesday April 13, 2005

By LEON GETTLER

The NAB monthly business index forecasts unemployment will creep back up to 6 per cent

DETERIORATING business conditions and a slowdown in the March quarter suggest the Reserve Bank may have to cut interest rates next year, a survey has found.

National Australia Bank's monthly business index shows conditions have been deteriorating over the past 12 months. It forecasts that slower growth will continue, with unemployment creeping back up to 6 per cent from its multi-decade low of 5.1 per cent.

NAB's latest index fell from 10 points in February to 7 points in March. This was well short of business expectations for the first quarter and seriously below the high of 17 points recorded in both October and June 2004 and the 16 points of March 2004.

All up, business conditions still looked robust, but there were signs that the slowdown was continuing.

The index of forward orders fell by 6 points to nil, the worst monthly outcome in almost three years. The only sector reporting a significant increase in orders was mining.

Business investment might have begun to weaken too, with a relatively low reading for the second month in a row.

"With business conditions progressively slowing through the March quarter, there are also signs within the survey to suggest - as we expect - that the slowing will continue," NAB chief economist Alan Oster said.

Mr Oster said there was no need for the RBA to increase the cash rate. In light of the central bank's decision last week not to increase rates - a surprise move, as most economists had expected the RBA to tweak rates up by another quarter percentage point - he tipped the RBA would be on hold for the rest of 2005.

"That said, in the near term, given the prospects of increasing inflation, the RBA's bias for cash rates will clearly still be upward."

Further out, however, the RBA would probably adjust downwards as the slowdown continued.

CommSec economist Craig James tipped the bank would lift rates next month, "in the knowledge that both purchase and labour are continuing to accelerate". "There seems little justification in maintaining mildly expansionary monetary policy settings in the current environment," Mr James said.

Labour costs increased at an annualised rate of 5.7 per cent in the quarter. NAB has maintained its revised lower GDP forecast for 2005 of 2 per cent.

© 2005 The Age

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