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Australia June Business Confidence at 7-Year Low

Australian business conditions deteriorated sharply in June as profits and sales fell from the previous month, providing further evidence the economy was cooling and relieving some of the pressure for more rate hikes.

The National Australia Bank's (NAB) index of overall business conditions shed 7 points in June to 0, the worst monthly outcome since late 2001 and well below last October's record peak of 20.

The survey, released on Tuesday, showed business confidence fell 5 points to -9 in June, the lowest since September 2001. Confidence was lower in most sectors, except for the booming mining industry.

The figures come a day after a private survey showed a fall in job advertisements, providing further evidence of softening demand in the drum-tight labor market.

"Overall, the survey finds a broad-based slowdown in domestic activity and a still subdued and volatile export performance," said Jeff Oughton, head of Australian economics at NAB. "Business conditions appear consistent with domestic demand and non-farm GDP growth of around 2.5-3.0 percent during 2007/08, significantly slower than portrayed by the estimates in the March national accounts as well as bit slower than anticipated by NAB and most forecasters."

A Reuters poll released last week showed economists expected Australia's gross domestic product (GDP) in the June quarter would be 2.9 percent higher than the same quarter of 2007.

That was below a forecast of 3.6 percent in an earlier Reuters poll and also below actual growth of 4.2 percent a year earlier.

The NAB survey's measures of sales and profits fell sharply in June, hurt by decade-high interest rates and slumping consumer confidence. Capacity utilization was steady at 82.5 percent.

"It will be important to see these lower readings repeated and sustained; increasing spare capacity is usually a leading indicator of lessening wage pressures and, more generally, is seen as dovish for the outlook for core inflation," said Oughton. "Also supportive of this view is the emergence of sustained falls in forward orders."

The forward orders index was down 3 points in June, the third consecutive monthly fall, and was well down on the double-digit rises reported in late 2007.

The survey also showed that while wage pressures remained relatively high, they steadied in June. Purchase cost pressures associated with oil and other commodities continued to pick up sharply, and retail inflation edged higher.

June purchase costs increased 2.6 percent, following increases of 1.2 percent and 2.4 percent in May and April, respectively.

The annual rate of purchase cost increases accelerated to 5.2 percent during 2007/08 from below 4.0 percent during 2006/07.