Australia business confidence up even as activity weakens -survey

SYDNEY, April 9 Mon Apr 8, 2013 9:33pm EDT

SYDNEY, April 9 (Reuters) - Australian businesses reported the weakest activity levels in four years in March as sales and employment slipped, yet the same survey showed firms grew more optimistic on the outlook at least in sectors sensitive to lower interest rates.

The survey of over 400 firms by National Australia Bank found the high local dollar was keeping manufacturers deep in the doldrums. Retailers also complained of poor activity in March, even as official data showed sales in the first two months of the year were the strongest in at least a decade.

The survey's main measure of business conditions dropped 4 points to -7, the lowest reading since May 2009. In contrast, its measure of confidence edged up a point to 2 in March, led by an improvement in the wholesale and construction sectors.

"While lower borrowing rates and the recent upturn in equity prices appear to be working to gradually strengthen activity in the retail, wholesale and manufacturing sectors, this survey implies that these effects may need longer to fully work through the economy, or perhaps more stimulus may be necessary for 'normal' activity to resume," said NAB's chief economist, Alan Oster.

After cutting rates in November and December, the Reserve Bank of Australia (RBA) has held steady at 3 percent in the expectation that there was enough stimulus in the pipeline to revive demand.

There have been scattered signs the policy was working. As well as the jump in retail sales, demand for new vehicles has been strong, unemployment has stayed low and rising home and equity prices have boosted household wealth.

The NAB survey, however, suggested many businesses were not feeling the benefit. Its measure of sales dropped 4 points in March to -4, while profitability stayed at a low -6 and employment eased 2 points to -5.

Yet there was a broad based improvement in the index of forward orders, which firmed 6 points to -5, while exports edged up a point to stand at 0.

The mixed results continued in measures of confidence, where mining suffered a sharp slump but optimism grew in wholesaling and construction.

The survey was more consistent when it came to a lack of inflation, with firms reporting muted labour costs and falling retail prices.

"With inflationary pressures well contained, there is thus scope for two more rate cuts by year-end -- possibly in June and November," said Oster. "Timing is still fluid with higher house prices a possible delay factor but the unemployment path will be the key variable."

The RBA has said that the benign inflation outlook meant there would be scope to ease if needed to support demand, though it seems content to sit on the sidelines for the moment. (Reporting by Wayne Cole)