domestic demand slowing nab survey

There are signs domestic demand may have peaked while business confidence is continuing to be eroded by volatility in financial markets, new figures show.

The business activity index contained in the latest National Australia Bank Monthly Business Survey rose two points to 17 index points in December, mainly due to better mining and wholesale conditions.

However, business conditions for the non-farm business sector as a whole eased over the final two months of last year after a significant fall of five points in November.

In December, an improved profitability performance - the index rose five points to 19 - more than offset a moderation in job gains with the employment index down two points to 10.

Trading conditions were steady at 21 index points.

In trend terms, both trading conditions and to a lesser extent profitability look to have peaked and begun to move lower while job gains remained strong and steady.

Total sales, as measured by the Trading Conditions Index in seasonally adjusted terms were steady at 21 index points in December, after falling significantly in November.

In December, export sales remained flat at a reading of nil with the trend broadly unchanged for the third consecutive month.

The business confidence index, meanwhile, fell by a further index point to five index points in December, reversing gains in mid-2007.

Confidence in the near term - at five points - remains a bit below the long-term average of seven points and has returned to the recent lows of late 2006.

"The key finding of the December survey is that business conditions remained very strong at the end of 2007," NAB chief Alan Oster said.

"Confidence, on the other hand, continued to erode and no doubt will have eroded further in January given the falls in global equity markets," he said.

Mr Oster said the December survey results also provide further evidence that, while business conditions are strong, they have passed their peak and are expected to continue to ease.

He said that while profitability increases drove improvements in business conditions in seasonally adjusted terms in December, in trend terms both trading and profitability had slipped over the past few months.

"Overall, our preferred measure for relating the readings from the survey to economic activity (based on the rate of change in survey business conditions) suggests that domestic demand at the end of the December quarter was still travelling at a robust four per cent but slowing."

"An expectation that activity will continue to slow would be consistent with the impact of higher interest rates, a still strong currency and continuing problems in global financial markets."

Mr Oster said the volatility in financial markets was, however, likely to keep the Reserve Bank of Australia on the interest rate sidelines next week.

The RBA board meets on February 5 to discuss interest rates and will announce its decision the same day.

"Given the turbulence in world financial and equity markets, the RBA will probably wait out its next meeting providing markets time to settle before hiking again," Mr Oster said.

"Aggressive rate cuts in the US and deteriorating growth prospects in Europe, however, do not represent a reason for the RBA staying its hand in current circumstances.

"Only if the RBA significantly lowers its global growth outlook - relative to what it and we currently see as the most likely outcome - would it consider a more lengthy pause.

"On the basis that global markets will take some time to settle back to better reflect economic fundamentals we see the more likely timing of the next rate rise as March rather than the February meeting.

"That said, if markets settle more quickly than expected, a February rate rise could not be ruled out."