-Alan Oster, chief economist at NAB
Australian business conditions deteriorated in December, while sentiment remained weak, increasing pressure on the Reserve Bank of Australia to cut interest rates in the coming months. According to the National Australia Bank, Business Confidence Index climbed to 2 in December, up from 1 in the preceding month due to lower oil prices, whereas NAB Business Conditions Index slipped from 5 to 4, falling for a second consecutive month. All three sub-indexes of the conditions index, namely profits, sales and employment, fell in December. Despite ultra low interest rates, record house prices, falling fuel costs and a weaker Australian Dollar last year, business continues to struggle with weak demand due to a decline in mining investment and commodity prices after a decade-long boom.
Australia has faced much weaker growth levels over the last couple of years, especially as the commodity-exporting economy has been substantially hurt by the recent fall in global commodity prices, slower growth in its top export destination China, and a relatively-strong exchange rate. Weaker economic settings have forced the RBA to deploy the most accommodative policy settings ever seen in the country, however many experts are projecting the central bank to reduce interest rates even further this year. The NAB expects that the RBA will have to slash rates twice this year in order to prop up the nation's economy, counter cooling inflation and increase in unemployment rate to 6.6%.
© Dukascopy Bank SA