Australia Business Confidence Holds at Seven-Year Low

By Jacob Greber

Aug. 12 (Bloomberg) -- Australian business confidence held at the lowest level in seven years as the highest borrowing costs in more than a decade prompt consumers to slash spending.

The confidence index was unchanged in July at minus 9 points, according to a National Australia Bank Ltd. survey of more than 400 companies. That matched the weakest result since the Sept. 11, 2001, terrorist attacks in the U.S.

Company profits and sales are falling as households battle with more expensive gasoline and the highest interest rates since 1996. The central bank said yesterday it will have more room to cut borrowing costs because of a ``significant moderation'' in domestic demand that will ease inflation, slow economic growth by half and drive up unemployment.

``Clearly this cyclical slowdown is significant and far from finished,'' said Alan Oster, chief economist at National Australia Bank in Melbourne. ``If a hard landing is to be avoided in 2009, it is clear that domestic policy, especially monetary settings, need to be eased significantly.''

The Australian dollar was unchanged after the report at 87.76 U.S. cents at 11:35 a.m. in Sydney. The two-year government bond yield fell to 5.88 percent from 5.89 percent just before the report was released.

The Reserve Bank of Australia yesterday said the economy will probably expand 2 percent this year compared with 4.3 percent in 2007. Consumer confidence slumped in July to the weakest level in 16 years, home-loan approvals tumbled in June to a four-year low, and retail sales fell 1 percent.

Job Losses

The slowing economy is forcing some companies to cut staff. Qantas Airways Ltd., Australia's largest carrier, said last month it will fire 1,500 workers, and meat processing company Don Smallgoods will cut 640 jobs.

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

The survey's business conditions gauge fell to minus 5 in July, the lowest reading since October 2001. The index, a measure of corporate hiring, profits and sales, has dropped 25 points since October, the fastest rate of decline since the early 1990s, Oster said.

The ``large falls in sales and especially profits have begun to reflect in reduced labor hiring and a significant easing in capacity utilization,'' Oster said.

Interest Rates

Job-vacancy advertisements fell for a third month in July, adding to signs employers will pare hiring as economic growth slows, a report by Australia & New Zealand Banking Group Ltd. showed on Aug. 4. The unemployment rate has risen to 4.3 percent in July from 3.9 percent in February, the lowest level since 1974.

Central bank Governor Glenn Stevens and his board left the benchmark lending rate at 7.25 percent last week after raising borrowing costs in March by a quarter point. That followed similar moves in February, November and last August to cool inflation that hit 4.5 percent in the second quarter.

The bank aims to keep annual price gains to between 2 percent and 3 percent on average.

The Reserve Bank said yesterday ``economic growth will be fairly slow in the period ahead,'' suggesting Governor Stevens will ignore a spike in inflation to prop up the economy. He predicts inflation will peak at 5 percent in the fourth quarter of this year before returning to below 3 percent in 2010.

``Recent Reserve Bank statements highlight that the focus has now switched from inflation to mitigating the faster-than- expected slowing in demand that has occurred,'' Oster said.

Stevens and his board will cut the overnight cash rate target by at least 25 basis points to 7 percent when they meet on Sept. 2, according to 18 of 25 economists surveyed by Bloomberg last week. Five predict a 50 basis point reduction and seven expect no change.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net