Australia's Business Resilient In Face Of Market Woes

Australian business shrugged off the worst of the global financial market turmoil in August, cutting the risk that contagion from the U.S. subprime market meltdown will leak into the real economy and put a brake on growth.

Conditions for business remained at record highs in August, according to a survey of 600 firms by the National Australian Bank conducted late in August. NAB said Tuesday its business conditions index was unchanged at +19 points in August, but business confidence took a small hit, falling 2 points to +10 in August. The strong result affirms the Reserve Bank of Australia's controversial decision to raise official interest rates in early August, just as gathering subprime storm clouds burst over Wall Street. Profitability remained strong across all firms, suggesting the Australian economy has overcome early hurdles thrown up by market upheavals which included wild swings in the Australian dollar and warnings the U.S. economy could slip into recession. "Given recent financial market turmoil, today's result is quite reassuring," said Adam Carr, senior economist at UBS. "This illustrates the fact that problems in the financial markets at this stage are really quite contained to the U.S.," Carr said. Treasurer Peter Costello was upbeat on the domestic economic outlook in parliament Tuesday saying growth is strong and the investment pipeline is full with A$23 billion worth of engineering projects, and 1000 jobs per day being added to the economy. RBA Governor Glenn Stevens will give his first speech in more than a month next week, with economists expecting he will signal the central retains its tightening bias, but is sidelined while financial markets are under pressure. Liquidity and confidence remained constrained in Australian money markets Tuesday with the RBA continuing to pump funds into the banking system in an effort to lower soaring yields on 90-day bank bills, which recently struck 11-year highs above 7.0%. As a result, all eyes are on major banks amid fears the higher funding costs in the professional money markets will be passed to the mortgage belt, which is already straining after 4 interest rate hikes since May 2006. Matthew Johnson, senior economist at ICAP, said the NAB business survey was confirmation that the underlying pulse of the economy stayed strong through August, bringing with it inflation concerns. "Given that labor demand and capacity utilization remains near highs...they will be keeping the RBA worried," he said. Johnson said the RBA is likely to stay on the sidelines for now, as the rise in money market yields represents a tightening of monetary conditions. "The RBA will not hike due to strong data, as the money market has delivered the tightening already...I see no reason to change that," he said.