Australian Business Confidence Drops to 7-Year Low

By Victoria Batchelor

July 8 (Bloomberg) -- Australian business confidence fell to the lowest level in seven years in June as cooling domestic demand and spiraling raw-material costs eroded corporate profits.

The confidence index dropped to minus 9 points from minus 4 in May, according to a National Australia Bank Ltd. survey of 335 companies. It was weakest result since the Sept. 11, 2001, terrorist attacks in the U.S.

The decline mirrors surveys across the globe, with New Zealand corporate sentiment at a 33-year low and European investor confidence dropping by a record amount. Retailer Just Group Ltd. and builder Mirvac Group Ltd. both cut earnings forecasts in the past two weeks as interest-rate increases buffet consumer spending, while record fuel costs forced Qantas Airways Ltd. to reduce routes and fire workers.

``The bottom line is for a marked slowdown in Australian economic growth,'' said Alan Oster, chief economist at National Australia Bank in Melbourne. ``Activity across interest-rate sensitive areas has moderated significantly.''

Australia's dollar traded at 95.50 U.S. cents at 11:31 a.m. in Sydney from 95.57 cents before the report was released. The two-year government bond yield fell 4 basis points to 6.71 percent from yesterday.

The sentiment index posted its sixth straight reading of less than zero, which indicates companies expecting their industry to deteriorate outnumber those seeing an improvement.

Interest Rates

The survey's business conditions gauge fell to zero, also the lowest since 2001, from 7 points in May. The reading is a measure of corporate hiring, profits and sales in June.

Weaker Australian confidence follows reports this week that showed job advertisements dropped by the most in almost two years in June and construction work contracted. They all reinforce speculation the central bank has finished raising interest rates.

``The Reserve Bank will remain on an inflation alert, but it will become increasingly less alarmed'' as the slowing economy helps quell price pressures, Oster said. ``The bank will remain on hold for the rest of 2008, before lowering the cash rate during 2009.''

Central bank Governor Glenn Stevens and his board have raised borrowing costs in four quarter-point moves since August to cool inflation that is running at the fastest pace in almost two decades.

Shares Decline

The adjustments boosted the benchmark interest rate to 7.25 percent. Higher borrowing costs pushed consumer confidence down to the weakest in 16 years, triggering a slowdown in spending.

The S&P/ASX 200 index of shares has dropped 21 percent this year, outpacing declines in benchmark stock indexes in the U.K., Japan and the U.S. Australia's stock index was little changed at 5,006.50 today.

Just Group, the nation's largest specialty clothing retailer, cut its profit forecast last week as record fuel prices and higher interest rates erode sales.

Earnings-per-share will be between 29.2 Australian cents and 30.6 cents in the year ending July 31, compared with last month's forecast of 33.4 cents, the Melbourne-based company said.

Mirvac Group Ltd., a property investor and apartment builder, said 12-month earnings may be as much as 8.5 percent lower than previously forecast.

Qantas Airways, the nation's largest carrier, said in June that it will slash services to Japan, shift other Asian routes to low-cost unit Jetstar and cut jobs.

As domestic demand slows, a mining boom is helping shore up Australia's economy. Exports rose to a record in May as demand from China boosted earnings from iron ore and coal shipments.

``Mining conditions, if anything, have picked up since late 2007,'' Oster said. ``Solid expansion in emerging-market economies, such as China and India,'' are spurring global growth.

To contact the reporter on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.