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Australia Businesses Stay Positive Despite Rate Rises

Australian businesses stayed remarkably upbeat last month despite a second rise in interest rates, a survey showed on Tuesday, suggesting the economy could weather further tightening ahead.

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The strength helped take the sting out of government figures showing net exports were a far larger drag on the economy than expected in the third quarter, and helped keep the Australian dollar firm.

The monthly survey of over 400 firms from National Australia Bank showed its measure of business confidence rose 3 points to 19 in November, the highest since May 2002.

The improvement came even though the Reserve Bank of Australia (RBA) raised interest rates for a second time early in the month, and justifies the central bank's confidence in the economy. The RBA has since lifted rates again to 3.75 percent and investors expect further gradual hikes toward 5 percent in 2010.

"The domestic economy continues to show significant momentum," said NAB's chief economist Alan Oster.

"Confidence continues to build and forward orders are now at their highest level since late 2007," he added. "All of this is truly a remarkable outcome and one that continues to surprise."

Oster expects the RBA will raise rates by 25 basis points in both February and March, with the cash rate eventually reaching 4.75 percent by the end of 2010.

Interest rate futures show around a 50:50 probability of a hike to 4.0 percent at the RBA's next policy meeting on Feb. 2.

The survey's measure of business conditions eased 2 points to 10, but that gave back only a little of October's sharp rise and remained well above the long run average.

There was also a notable pick up in retail and wholesale activity, boding well for the Christmas shopping season.

What A Drag

The optimism of firms in November helped outweigh figures for the third quarter showing net exports, or exports minus imports, likely subtracted a hefty 1.8 percentage points from gross domestic product (GDP) in the third quarter.

That was far more than the 0.3 percentage points forecast by analysts and counteracts strength in government investment and inventories. That suggests economists will have to revise down forecasts for GDP growth in the quarter.

"It's a very big drag and we'll likely trim our forecast to growth of 0.3 percent, from 0.75 percent," said Brian Redican, a senior economist at Macquarie.

"But a lot has happened since Q3, making GDP really only of historical interest," he added. "The NAB survey is a better guide of where things are now and that showed a rock-solid economy."

The government data also showed Australia's current account deficit widened, as expected, to A$16.18 billion ($14.8 billion) in the third quarter, from A$13.13 billion the previous quarter.

The balance of goods and services swung to a deficit due largely to lower export earnings from rural goods, coal and iron ore, while imports of capital goods and oil rose.

Still, analysts remain bullish on the outlook for exports thanks to growing Asian demand for Australia's abundant resources, like coal, iron ore and liquified natural gas (LNG).

Indeed, the RBA itself has highlighted the prospects for a boom in foreign investment in Australia's resources sector.

Just a few days ago Chevron agreed to sell LNG to Japan's Tokyo Electric Power in a deal that could be worth A$90 billion over 20 years.

Chevron this month officially started work on its massive A$43 billion Gorgon LNG project off the cost of Western Australia, which should start producing in 2014.

The RBA estimates investment in this sector could rise from around 0.5 percent of GDP now to about 2.5 percent in the next four to five years.

Ultimately, the value of LNG exports could match that of coal or iron ore, the country's biggest earners.

It also expects output of coal and iron ore to expand by around one third over the next two years.