Alarm bells clang on Oz economy

The soaring dollar, retail woes and several grim confidence surveys are making Australians nervous. Photo / Supplied

Signs of trouble in Australia's retail sector set new bells ringing for an economy whose fortunes now rest largely with mineral and energy resources and the health of China, and which beyond this is slowing to a disturbing degree.

David Jones has become another blow to the crumbling confidence of both business and consumers. With one eye on trouble at home and another on disturbing trends abroad, their concerns have been reflected in a series of depressing surveys and the most recent Reserve Bank forecasts.

Even the politically armoured optimism of Treasurer Wayne Swan is showing dents.

He said the high Australian dollar was holding back sectors not tied to the mining boom, and was a burden for many industries, such as manufacturing and tourism.

"Despite our impressive scorecard, we know that the GFC [global financial crisis] is still having a lingering impact on some parts of the economy, as is the continued uncertainty in the global economy," he said.

"On top of this, we've taken a huge hit from last summer's natural disasters, and although we've made significant progress in recovery, there's still a long way to go."

Concern about the impact of the resources boom, especially on tourism, retail and manufacturing was clear in business confidence surveys by Dunn & Bradstreet, the National Australia Bank, the Australian Chamber of Commerce and Industry and Sensis.

All have common themes: at home, expectation of deteriorating business conditions, rising costs, the strong dollar and, despite signs to the contrary, a resumption of interest rate rises; abroad, worries about the American economy, and warnings of another global crisis emerging from Europe.

Although less pronounced, there is a clear perception of the economy's vulnerability to China and the A$100 billion-a-year ($126 billion) trade that has underwritten Australian resilience.

Last week's news of better-than-expected 9.5 per cent second-quarter Chinese growth indicated continued strong demand for Australian commodities, but the outcome was slightly down on the first three months and came amid concerns over domestic problems.

Business and consumers also worry about the potential impacts of the planned carbon and mining taxes, and political instability surrounding Prime Minister Julia Gillard's leadership.

Dunn & Bradstreet's latest survey of business expectations for profit and employment were negative for the first time in two years, sales expectations plunged to a two-year low, and expectations for capital investment plunged to their worst level in a decade.

The new NAB monthly business survey said confidence had fallen six points to the depths reached immediately after last summer's floods and cyclones, with a dive in forward orders reflecting companies' fears of extended slow trading conditions.

The Australian Chamber of Commerce and Industry (ACCI) survey held more bad news: the index for sales and profitability fell to its lowest since the survey began in 1998, and expectations for national economic conditions and the investment climate over the next three months slipped below the 50 mark for the first time since the June 2009 quarter.

Describing the results as alarming, ACCI director of economics and industry policy Greg Evans said mainstream businesses continued to face significant upward pressure on production costs and downward pressure on selling prices, putting a "significant squeeze" on business profit margins and viability.

The Sensis business index showed similar gloom: one of the largest quarterly falls in business confidence in the report's 18-year history.

"We have really only seen business confidence lower during the peak of the global financial crisis and during the introduction of the GST," report author Christena Singh said.

The nation's households are equally pessimistic. The Westpac-Melbourne Institute index of consumer sentiment dived by 8.3 per cent in July to its lowest level since May 2009, reaching the depths plumbed after the GFC and the introduction of the GST.

"We have seen 11 falls of this magnitude since the early 1990s recession, but only two of them have been from a lower starting point ," Westpac chief economist Bill Evans said. "Furthermore, such large falls have typically been associated with a major event such as an interest rate increase, a spike in petrol prices, the collapse of Lehmans, or recession fears."

The latest MasterCard index of consumer confidence also tracked rising household gloom, and Dun & Bradstreet's consumer credit expectations survey said about 30 per cent would have difficulty in meeting credit obligations in the three months to September.

New figures give little cause for optimism. The latest Australian Industry Group/PricewaterhouseCoopers performance of manufacturing index showed June manufacturing activity expanded at its fastest pace in almost a year, and the number of full-time jobs rose by 59,000 last month.

But the manufacturing boost was largely confined to construction materials and basic metals, and the jobs rise failed to move the unemployment rate of 4.9 per cent.

The housing market remains in the doldrums, despite a rise in new home lending in May. Approvals fell the same month, and the Housing Industry Association last week forecast a 13 per cent fall in housing starts in the two years to June 2012.

And after reporting a 1.2 per cent first-quarter contraction in the economy Reserve Bank governor Glenn Stevens warned: "Growth through 2011 is now unlikely to be as strong as earlier forecast."

RETAIL SLOWDOWN

* Retail giant David Jones warns of a sharp reversal in profit expectations for the second half of the year.

* Rather than a 5 per cent increase previously expected, a decline in profits of up to 9 per cent is forecast.

* This would cut as much as A$64 million from the group's bottom line for the period.

* Consumer sentiment dived by 8.3 per cent in July to its lowest level since May 2009.