Australian Businesses Struggle as Economy Shrinks



Australian Businesses Struggle as Economy Shrinks


By: Reuters


Australians are borrowing less while businesses faced the toughest
conditions in two decades, adding to expectations the economy
contracted in the first three months of the year in the first
recession since 1991.

Figures from the Reserve Bank of Australia (RBA) on Thursday showed
total credit rose a meager 0.1 percent in March, well below a forecast
0.3 percent rise, pulled down mainly by sluggish business credit that
declined by 0.6 percent from February.

That mirrored a private sector survey which showed businesses were
struggling with the worst conditions in almost 17 years last quarter.
A collapse in forward orders and exports, left them even more
pessimistic about the outlook for coming months.

The survey of more than 900 firms from National Australia Bank (NAB)
found business expectations for the next 12 months fell to their
lowest since the survey began in 1988, forcing many to cut back on
investments and hiring intentions.

"The most concerning aspect of the survey is the continuing
deterioration in both near and especially medium term expectations,"
said NAB Chief Economist Alan Oster. "Clearly business is expecting
further significant deterioration in economic activity."

That is not surprising as both the Reserve Bank of Australia and the
Labor government recently conceded the economy was probably in
recession. Australia's gross domestic product, or the value of all
goods and services produced, declined 0.5 percent in the fourth
quarter of 2008 and the RBA believes it contracted again in the first
quarter.

The contraction led the RBA to trim interest rates by a quarter of a
percentage point earlier this month. Markets expect it to the cash
rate at a record low of 3 percent when the monetary policy board meets
again next Tuesday.

So far, the RBA has lowered rates by 4.25 percentage points since
September, while the government has stepped in with stimulus packages
worth more than A$52 billion ($37 billion) to cushion the economy from
the severe global downturn.

More Pain Ahead

Yet risks remain, especially in the form of a rise in unemployment.
The jobless rate jumped by the most in 18 years in March, to touch 5.7
percent as more firms shed jobs to cut costs.

NAB's survey suggested further pain lay ahead with its index of
employment dropping 9 points to -25 last quarter, the lowest level
since December 1991, while the measure for the next 12 months fell to
-27.

Firms also cut back previously ambitious investment plans,
particularly in mining and manufacturing as demand slumped. The index
of capital spending plans for the next 12 months stood at -12, up only
slightly from a record low of -15 the previous quarter.

"Credit is cheap but there is a lack of demand with this likely to
remain the case as the labour market deteriorates further," said Su-
Lin Ong, senior economist at RBC Capital Markets. "While it suggest
scopes for further modest easing from the RBA, it also signals some
caution."

The data from the RBA showed there was limited appetite from
households to borrow amid growing worries about keeping their jobs.
Lending for consumer related purposes dropped by 0.3 percent in March,
marking its ninth fall in 10 months.

In contrast, the aggressive rate cuts and generous handouts by the
government to first-home buyers, borrowings for housing continued to
rise at 0.6 percent. That is likely to keep pressure on the government
to support the housing market in the federal budget due in two weeks.


http://www.cnbc.com/id/30490195

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