Australian business hits the skids, report shows

Tim Colebatch
Sydney Morning Herald
July 9, 2008

AUSTRALIA'S economy is braking sharply, with business reporting that soaring petrol prices and high interest rates have wiped away all positive momentum from demand.

Bankruptcies have soared to record levels.

The National Australia Bank's latest business survey says firms report that economic conditions are on the verge of negative territory for the first time since early 2002 as confidence has plunged deep into the red, to be the lowest since 1991.

The figures come as a Federal Government agency reports that a record 9201 Australians went into some form of bankruptcy administration in the June quarter. This is almost twice the number who were declared bankrupt at the peak of the 1991 recession.

In 2007-08 as a whole, a record 32,909 Australians were declared bankrupt or entered some other agreement with their creditors, the figures show.

The Insolvency and Trustee Service reports that 84% of bankruptcies now stem from some form of consumer debt, and only 16% from business failures.

NAB's head of Australian economics, Jeff Oughton, said the latest survey pointed to more trouble ahead. For the first time since 2002, marginally more firms reported cutting staff than increasing them, and more firms reported forward orders falling than rising.

Wage growth remained high but steady, while costs of materials were increasing. But Mr Oughton said NAB believed the economy remained headed for a soft landing, with output likely to grow 2.5% in the new financial year, and the Reserve Bank likely to keep rates on hold before making significant cuts in 2009 as inflation pressures ease.

In other economic news:

- The Master Builders Association reports that soaring prices for reinforced steel - up 60% in six months, partly due to soaring iron ore prices - have added $2000 to the cost of building the average new home.

- The Bureau of Statistics reports more Australians are holidaying overseas than foreigners holidaying here, as the high dollar makes Australia less attractive to tourists.

ICAP senior economist Matthew Johnson said the survey would give the Reserve Bank confidence that its policy of high interest rates to cool the economy was working. "The June NAB report suggests that the RBA has got things just right," he said.

The 330 firms surveyed in the non-farm sector highlighted weaker consumer confidence and higher interest rates as the main reasons behind weaker sales and lower profits.

The costs of running a business were also higher, the report said.

Purchase costs "continued to accelerate" and wage pressures stayed "relatively high".

These difficulties caused many firms to become more pessimistic - business confidence declined to its lowest mark since the September 11, 2001, terrorist attacks.

CommSec equities economist Savanth Sebastian said it was unlikely that sentiment would improve soon. "Consumers are likely to remain despondent over the rest of the year as rate hikes, a languishing sharemarket and soaring expenses continue to eat through the household budget, culling discretionary spending," he said.

This story was found at: http://business.smh.com.au/australian-business-hits-the-skids-report-shows-20080708-3bw6.html