Business condition slump – but rate cut on the way: Economy roundup

Business conditions have tumbled to record low levels, but the increasing likelihood of a rate cut in coming months should provide some light at the end of the tunnel for struggling businesses.

Business conditions have tumbled to record low levels, but the increasing likelihood of a rate cut in coming months should provide some light at the end of the tunnel for struggling businesses.

The Australian Chamber of Commerce and Industry Index of Small Business Conditions tumbled to 43.4 points in the June 2008 quarter, its lowest level since the survey started in 1996 and well below its five year average of 54.8.

A decline in non-wage labour costs was the only good news reported by the 2100 small businesses surveyed, with sales and profit growth, wage costs and selling prices all getting worse over the three months to June.

And small businesses are also very gloomy about the economic outlook, with the index of expected economic performance also falling to a record low for the survey.

ACCI director of industry policy and economic Greg Evans says the survey shows small business profitability is under heavy pressure.

“The RBA should move to cut official interest rates next month and later this year to arrest this slide in small business activity,” he says.

Evans will probably find today’s minutes from the July meeting of the Reserve Bank of Australia happy reading. They make clear the RBA’s conversion to a pro-cutting stance, with declining confidence and tight credit conditions the main reasons for the shift.

“Less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate,” the minutes state. “Given the slower trend in demand, scope to move towards a less restrictive setting of monetary policy was judged to be increasing.”

The prospect of a rate cut will also come as good news to the housing industry. According to the Housing Industry Association’s National Outlook publication for the June 2008 quarter, the gap between new housing starts and underlying demand for housing is likely to grow to 45,000 dwellings in 2008-09.

Sharply higher borrowing rates and building materials prices, together with hefty statutory costs to building, have generated a sharp decline in leading housing indicators over the last six to nine months,” HIA policy chief executive Chris Lamont says.

On the market’s today, selling in financial stocks have helped push the S&P/ASX200 down 1.7% on yesterday’s close to 4901.8 at 12.10pm.

Toy maker Funtastic as had a particularly rough day on the markets on news that takeover talks with private equity firm Archer Capital have fallen over. Just before midday Funtastic shares were down 23.2% on open to 0.38c.