Business: economic prospects fragile in face of drought, higher fuel prices and increased interest rates

The latest Visa - VECCI Business Trends and Prospects Survey shows that the while the short-term national economic outlook has improved slightly, local prospects have softened in the face of drought, higher fuel prices and increased interest rates.

VECCI's Chief Executive Officer, Mr Neil Coulson, says the survey of a cross-section of Victorian businesses taken in mid-September 2006 revealed that 32 percent of those surveyed anticipate that Victoria's economic performance will be weaker during the next twelve months, the same as the June quarter survey. Only 15 percent of surveyed businesses believe the State economy will experience stronger growth during the next twelve months, the same as the June quarter survey.

"Trading conditions were mixed during the September quarter 2006. While improvements in general business conditions, sales, exports, selling prices, employment and plant and equipment investment were reported, profitability, overtime and building and structures investment fell, possibly influenced by higher wages and other labour costs, fuel prices increases and interest rate increases.

"There is certainly a strong case against any move toward an interest rate increase this week on the part of the Reserve Bank, given the fragility in business confidence, the dampening effect of drought, higher fuel prices and the impact of previous interest rate rises on the economy.

"Neither the State nor the national economies are overheating due to excess demand conditions. As yesterday's inflation results showed, it is cost pressures that have pushed prices up in recent months.

"It is also hoped that parties will release pro-growth economic policies during the forthcoming State Election campaign to underpin continued business and investor confidence", says Mr Coulson.

Summary of Results from Visa-VECCI Business Trends and Prospects Survey

• Trading conditions for Victorian businesses softened during the September quarter 2006. Growth in general business conditions and sales levels eased during the quarter but remained positive, while profitability declined, and wage pressures continued to grow. Over the next three months, general business conditions, sales, exports, wages, selling prices, profitability and employment levels are all expected to rise.
• VECCI's Business Sentiment Index for the Australian economy rose marginally over the September quarter, signalling a mild improvement in the business community's perceptions of the prospects for the national economy over the next twelve months. A total of 22 per cent of respondents anticipate that the Australian economy will experience stronger growth over this period, an increase on the June quarter 2006, when 19 per cent of respondents held this view.
• Those industries where a notable proportion of respondents consider that Australia's economic performance will strengthen over the twelve months to September 2007 include the building and construction (36%) and recreation, personal and other services (40%) sectors.
• In contrast, a sizeable proportion of respondents in the manufacturing industry (31%) believe that national economic conditions will weaken over the forward period.
• Victoria's economic outlook remained steady over the September quarter 2006, with a total of 15 per cent of surveyed businesses anticipating that the State's economy will experience stronger growth during the next twelve months, consistent with the 15 per cent of respondents who held this view over the June quarter 2006. Thirty-two per cent of respondents expect Victoria's economy will weaken over the next 12 months.
• Businesses in the recreation, personal and other services (25%) and building and construction (23%) industries hold the most optimistic expectations for the future performance of the State economy.
• In contrast, wholesale and retail trade (41%), manufacturing (38%), transport and storage (31%) and finance, property and business services (31%) were industries where a sizeable proportion of respondents believe that State economic conditions will weaken over the next twelve months.

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