By Jacob Greber
Nov. 11 (Bloomberg) -- Australian business confidence plunged last month to a record low, suggesting the economy may fall into a recession for the first time since 1991.
The sentiment index slumped 21 points to minus 29 from September, the lowest level since the series began in 1989, according to a National Australia Bank Ltd. survey of more than 400 companies conducted between Oct. 23 and Oct. 30.
The threat of a looming global recession is a key reason central bank Governor Glenn Stevens has slashed the benchmark lending rate by 2 percentage points since the start of September to a 3 1/2-year low of 5.25 percent, the biggest reduction in 17 years. Australia's benchmark S&P/ASX Index of stocks is down 4.2 percent today, extending this year's decline to 38 percent.
``Fear reigns supreme,'' said Alan Oster, chief economist at National Australia in Melbourne. ``Continuing volatility in global equity markets, emergency financial packages, falling commodity prices and continuing talk of a global recession have finally broken business optimism.''
The Australian dollar fell to 66.62 U.S. cents at 12:03 p.m. in Sydney from 66.95 cents just before the report was released. It has plunged 32 percent since reaching a 25-year high of 98.49 cents on July 16. The two-year government bond yield dropped 1 basis point to 3.64 percent. A basis point is 0.01 percentage point.
Bank Seizures
Sentiment is also being buffeted by negative company reports. Harvey Norman Holdings Ltd., Australia's biggest furniture and electronics retailer, said today its like-for-like sales in the 28 days ended Nov. 9 fell 2.8 percent.
Childcare provider ABC Learning Centres Ltd. and Allco Finance Group were both seized by their banks last week.
Rio Tinto Group, the world's second-largest iron ore exporter, said yesterday it will cut output at its mines in Western Australia by 10 percent because of reduced demand from steelmakers in China.
Fortescue Metals Group Ltd., Australia's third-largest iron ore exporter, will also reduce production.
Most concerning is a drop in forward orders ``to near recessionary levels'' among manufacturing and retail companies, Oster said. A gauge of orders fell 10 points in October to minus 20, the lowest since mid-1991, today's report showed.
Hard to Borrow
One in four businesses is finding it harder to borrow, according to a new measure of credit availability in today's National Australia report.
``The greatest credit difficulties were reported by finance, property and business services,'' and about 35 percent of companies expect credit to become tighter in the next month, the report said.
Evidence is mounting that consumers and businesses have scrapped spending plans as the global financial turmoil deepens. Qantas Airways Ltd., Telstra Corp. and Ford Motor Co. are among companies firing workers.
House prices fell 1.8 percent in the third quarter, the biggest drop since 1978, retail sales tumbled in September by the most in three years, job advertisements slid for a sixth month and home-loan approvals fell for an eighth month, recent reports showed.
The Reserve Bank of Australia yesterday cut its 2008 economic-growth forecast to 1.5 percent from 2 percent and said it had been forced to make ``unusually large'' reductions in the overnight cash rate target in October and November because renewed global turmoil raised the risk the expansion will stall.
More Cuts
The central bank also signaled it may reduce the rate further to avoid ``an unduly sharp weakening'' in demand.
The slump in business sentiment came even after Governor Stevens and his board slashed borrowing costs by 1 percentage point on Oct. 7, the biggest single reduction since 1992. They also lowered the rate by a quarter point on Sept. 2 and three- quarters of a percentage point a week ago.
Stevens will cut the benchmark rate by another half point to 4.75 percent on Dec. 2, according to 12 of 19 economists surveyed by Bloomberg News. Five expect a quarter-point reduction, one tipped a three-quarter percentage point cut and one forecasts a 1 percentage point decline.
``We see no reason for the Reserve Bank to do other than continue to rapidly lower rates,'' National Australia's Oster said, adding that the benchmark rate will be reduced to 3.75 percent in the first quarter of next year.
Business Conditions
The survey's business conditions gauge, a measure of hiring sales and profits, tumbled 10 points in October to minus 11, a level last seen in early 2001 following the dot-com bust, today's report said.
``It's worth noting that confidence readings worse than the bottom of the 1990s recession has more to do with fear of the unknown than actual current outcomes,'' Oster said.
The National Australia sentiment index posted a 10th straight reading of less than zero in October, which indicates companies expecting their industry will deteriorate outnumber those seeing an improvement. The previous record low was minus 24 in December 1990, Oster said.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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