NAB 1: Economy Stronger than Thought

  The economy is & #160;blooming after what the National Australia Bank said yesterday was a ''remarkable' rise in confidence, and a big positive rise & #160;in conditions in October. & #160;On Monday there was some angst about a dip in newspaper and online job ads last month, and now & #160;there's no sign of any concern as the latest National Australia Bank survey of business revealed what it called & #160;the & #160; & quot;remarkable ongoing strength & quot; & #160;in business confidence, and a surprise surge in business conditions.So rapid has been the rise in conditions that they are now back to levels of early last year and well before the Lehman Brothers collapse in September, 2008.It's a development the Reserve Bank will note with considerable interest ahead of the next meeting on & #160;December 1. & quot;Business confidence edges higher - a remarkable result given the recent surge to very high levels, & quot; the NAB said in its statement on the survey. & quot;Business confidence increased by 2 to +16 points in October. & #160;In October the strength was mainly in construction, transport and personal & #38; recreational services. Mining was lower. & quot;Business conditions jumped sharply in October - up 9 to +12 index points -above long run averages and back to results reported in early 2008, & quot; the NAB reported.Instead of lagging well behind confidence levels as in previous months, business conditions have jumped, possibly meaning that the falls in the job ads last month were a one-off and that fears for a small rise in unemployment in Thursday's & #160;labour force figures might not be realised.Given that the first rate rise and continued talk of another for November (which happened), didn't impact business confidence or conditions, you'd have to wonder whether the Reserve Bank might look at this survey result and then turn the rate setting knob up a notch or three. & #160;This is a very strong result from the NAB's survey and indicates that those fears of a slow down in demand and activity in the economy after the cash stimulus impact dissipated might not happen. Another couple of months of survey results like this and the federal government won't have any & #160;justification for avoiding making bigger cuts to the remaining stimulus programs.In fact the solid rebound in our market, while bouncing with the upbeat sentiment offshore (which is still being driven by the cheap money from central banks and ultra low interest rate regime), has also increasingly reflected the belief that the economy is more solid than believed.AGM updates and company outlooks seem to be more optimistic and the news of the wide improvement in conditions in the latest NAB survey should give a lot of heart.As a result, the Bank said it had lifted its Australian GDP forecasts & #160; & quot;in light of strong survey results & quot;. & quot;We now see GDP in 2009 at around 1% (+½% previously) and 2½% in 2010 (2% previously). & #160;But the latter mainly reflects base effects with the 12 months to Dec. 2010 forecasts unchanged at 3%. Unemployment peak lowered to 6½% (previously 6¾%). & quot;Forecasts for core inflation a touch higher, but with strong currency, we see inflation at 2% by end 2010. & quot;We still see RBA increasing by 25 points in each meeting till March (i.e. Cash at 4¼% in early 2010). Our longer term rate path unchanged - 4¾% end 2010 & #38; a peak of 5½% by mid 2011. & quot;That strength was broad based- with strong gains in trading, profits & #38; employment. Across sectors the main gains in activity were in transport, manufacturing and personal & #38; recreational services, & quot; the NAB said.In fact the way conditions have jumped seems to indicate a bit of a catch up with the earlier improvement in confidence as businesses saw conditions starting to improve, then that being reflected in the actual results.More importantly, the improvement in conditions was broad-based, much more so than in previous surveys. & quot;Improved business confidence appears to have been justified by stronger business outcomes. & quot;All parts of the index improved strongly. Profits were up 9 to +13 points, trading up 7 to +15 points, and employment up 8 to +7 points. For trading and profits those are the best reading since February 2008 and for employment the best since April 2008, & quot; the bank said in its survey summary. & #160; & quot;Strength in activity is also apparent in improving capacity utilisation while business has also restarted inventory accumulation. & quot;The only softness in the Survey is new orders, but the level of orders would still be consistent with strong domestic demand (4% annualised). & quot;Wage pressures are still low, as are economy wide price pressures. Purchase costs continue to track down (high AUD) and, importantly, retail prices continue to slow sharply, & quot; the NAB said. & #160;  

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