August 13, 2013 / 2:02 AM / 4 years ago

Australia business confidence index at eight-month low: survey

3 Min Read

A passenger ferry navigates past the Sydney Opera House and the Central Business District on a sunny winter afternoon in Sydney July 31, 2013.Daniel Munoz

SYDNEY (Reuters) - Australian business confidence took a hit last month as firms reported an intensifying squeeze on profits, a survey found on Tuesday, underlining the case for record-low interest rates.

National Australia Bank's (NAB.AX) monthly survey of over 400 firms found weakness in sectors from finance to property and construction overshadowed a solid improvement in conditions for retail, mining and recreation.

The survey's main measure of business conditions stayed at a revised -7 points in July, led by a further decline in profitability to its lowest in over four years. Indices of sales and employment improved somewhat but remained soft historically.

Its measure of business confidence fell back to -3, from 0 in June, meaning pessimists outnumbered optimists.

For a graphic click on: link.reuters.com/qar23t

"Business confidence fell to the lowest level since November 2012, with a falling dollar and the lure of lower interest rates unable to lift the mood of businesses," said NAB's chief economist, Alan Oster.

"It is likely that the weakness in business activity and profitability -- via the inability to pass on higher costs -- is the key driver of weaker confidence."

The sour mood among businesses was one reason the Reserve Bank of Australia (RBA) cut its cash rate to an historic low of 2.5 percent last week.

Investors think at least one more rate cut will be necessary to support activity as a long boom in mining investment finally crests. September is generally thought too soon for a move, especially as the meeting is just a few days before a Federal election, but interbank futures are almost fully priced for an easing by December.

NAB's Oster expects the RBA will ease to 2.25 percent in November, and the risk will remain for even lower rates in 2014.

The pressure on firms' margins was clear in the survey's measure of profitability which slipped two points to a low -11.

Product prices dipped in the month even as purchase costs increased, perhaps due to the impact of a lower currency on import prices.

The Australian dollar has fallen around 14 percent against its U.S. counterpart since April, a trend that should help industry become more competitive over time.

The survey's index for sales did improve 3 points to -4, while that for employment added a point to -5. Capacity utilization also picked up to 79.9 percent.

NAB said its measure of business investment also lifted from -3 points in June, to -1 point in July.

Firms reported a jump in labor costs in July, after a very subdued run, though this may have been due to the one-off impact of a rise in the national minimum wage at the start of July.

Reporting by Wayne Cole; Editing by Shri Navaratnam

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