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Australia Business Conditions Worsen, but Confidence Up

Australian business conditions deteriorated in July as retailers and wholesalers complained of falling sales and profits, a survey reported on Tuesday even as it found a marked improvement in confidence as firms thought things would get better.

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National Australia Bank's main measure of business conditions dropped 2 points in July to -3, to be 8 points below its long-run average. Yet the index of confidence jumped 7 points to stand at 4, led by the mining and recreation sectors.

NAB chief economist Alan Oster suspected sentiment had been boosted by progress in the euro zone crisis during July, along with the lagged effect of past rate cuts at home. The Reserve Bank of Australia (RBA) cut rates by 75 basis points over May and June.

In contrast, retailers and wholesalers seemed to suffer pay back from May and June when government handouts to households had delivered a one-off lift to spending.

The survey's measure of sales fell 6 points in July to -3 while that for profitability sank 6 points to -7 as price discounting hurt margins. While retail prices remained very subdued, both labor and purchase costs picked up.

On a firmer note, the index of employment rose 3 points to -1 thanks in part to a big improvement in the transport and utilities sector.

"The persistent divergence in industry conditions indicates that the Australian economy is undergoing a structural transformation towards mining and service-based industries, and away from traditional manufacturing and discretionary retailing," noted Oster.

Oster stronger economic growth in the first half of the year had led NAB to revised up its forecast for all of 2012 to 3.6 percent, from a previous 3.1 percent.

"With the full impacts of the RBA's 125 basis points of rate cuts since November 2011 yet to be realized, it seems reasonable to expect further stimulus to flow through to interest-rate sensitive sectors of the economy," he added.

As a result, a further cut in rates now appeared unlikely, at least in the near term.

"If the RBA were to lower rates again, it would most likely occur at the back-end of this year and this would require a material slowing in the labor market and domestic activity," said Oster.

"However, our, and the RBA's, outlook for growth and inflation appear consistent with no change in rates until the middle of next year."

The central bank held rates at 3.5 percent at its August policy meeting last week, saying the full impact of past easing had yet to be felt.