Australia's First-Quarter Business Activity, Employment Is Strong

Australian businesses reported strong trading conditions last quarter, generating more demand for labor and leaving the economy with little spare capacity, a survey showed on Tuesday.

The quarterly survey from National Australia Bank found a rise in employment offset slight dips in sales and profitability in the first quarter. As a result, its index of business conditions held steady at a firm 17 points in the quarter.

Expectations for the current quarter and the whole year improved. The expectations index for the current quarter rose by a point to 20 index points, while the outlook for the year was upgraded by 2 points to 34 points.

"Business activity remains at robust levels and as a result, business is becoming increasingly confident that these conditions will be maintained -- despite recent interest rate increases and fears of more to come," said Alan Oster, NAB's group chief economist.

The Reserve Bank of Australia (RBA) raised interest rates three times last year to contain inflation and financial markets are pricing in a better-than-60% probability it will tighten again in May.

Capacity utilization rose to a new record high of 83.7% and labor market conditions were tight with about 65% of businesses reporting that labor availability was a significant and/or a minor constraint on output.

Wages had responded by picking up, with quarterly rates of growth accelerating to 0.9% in the first quarter from around 0.75% previously. The annual rate moved up to around 3.5%, from 3%.

"It is getting harder to argue that wages are still relatively well behaved," said Oster. "The combination of still very tight labor markets and rising wage pressures means that the RBA could still surprise by moving back into action by mid year -- albeit we don't expect it."

Growth in purchase costs eased in the first quarter and firms expected a further moderation in the second quarter. Retail and overall price rises were well behaved -- increasing at a quarterly rate of 0.3 and 0.5% respectively. Expectations were for broadly similar outcomes in the current quarter.

"With upstream pressures starting to ease we see nothing in the survey to change our view that core inflation has probably peaked," added Oster.

Businesses also reported a significant rise in capital expenditure plans. The index measuring annual capex plans rose a further 2 points to 32 points, following the 10 point jump in the fourth quarter.

NAB said the result pointed to a re-acceleration in real underlying business investment growth to near 20%, from about 2% in the fourth quarter of 2006.