Banks see gloom on economy

A PESSIMISTIC outlook for the economy has seen National Australia Bank join ANZ in slashing its interest rate forecasts for the year.

A PESSIMISTIC outlook for the economy has seen National Australia Bank join ANZ in slashing its interest rate forecasts for the year.

Economists from NAB were on Friday tipping three more interest rate cuts this year, taking the Reserve Bank's rate from 3 per cent now to 2.25 per cent by the September quarter.

The bank's data and business surveys are pointing to a weakening economy and it is tipping the unemployment rate will rise to about 5.75 per cent by late this year.

"The last time we put out an official forecast was in the first week of December, and we were [forecasting] one cut.

"What we're basically saying is that what we are seeing says to us that we weren't sufficiently bearish," NAB's group chief economist, Alan Oster, said.

The gloomy outlook came even amid growing optimism of some recovery in the global economy with exports from Asian power China rebounding, while Europe is starting to show some signs of stabilising. This change of mood helped push the Australian dollar briefly above $US1.06 on Friday morning.

Even so, ANZ, which in December tipped the cash rate to be cut to 2 per cent this year, said on Friday it was pushing back its first forecast rate cut for 2013 from February to March, amid improving financial market sentiment, strengthening commodity prices and some positivity in recent economic data.

Westpac forecasts the Reserve Bank to cut rates by 25 points for 2013 and Commonwealth Bank expects rates to remain level at 3 per cent.

At the same time, financial markets expect there will be a one-in-three chance of the Reserve Bank cutting rates to 2.5 per cent by the end of 2013, Credit Suisse data showed.

European Central Bank president Mario Draghi said this week the euro-area economy would return to health this year and that there was a "positive contagion".

"We spoke a lot about contagion when things went poorly but I believe there is a positive contagion when things go well," Mr Draghi said on Thursday.

He was speaking after the ECB's decision to keep its benchmark interest rate at 0.75 per cent.

Mr Oster said preliminary versions of a full quarterly survey showed that in sectors already struggling, such as manufacturing, discretionary retail and construction, "the smaller you are the worse you are, so there's a cash flow issue there".

While the mining sector was expected to improve in December as iron ore prices soared, Mr Oster said he did not expect a big surge in new investment.

Economic data released this week was slightly weaker than expected, with retail sales falling 0.1 per cent in November.

The figure disappointed economists who had predicted a 0.3 per cent rise, as consumers cut back on spending on non-food items.

Bureau of Statistics data released on Thursday showed a 2.9 per cent growth in building approvals for November, just below expectations of 3 per cent, although private sector housing approvals fell 0.3 per cent.

Commonwealth Bank senior economist Michael Workman said the Reserve Bank's settings were "very stimulative" to households and businesses.

"The barrier here is that neither of those two groups feel very confident, and that's clear in the surveys," Mr Workman said.

"So that's making them overly cautious on their cash flow positions and saving rates," he said.

Mr Workman said he predicted confidence would pick up in the second half of this year if there was further progress in China's growth and on the sharemarket.

"The stockmarket is finally starting to perform a bit more in line with the overall growth and profitability outlook of the Australian economy," he said.

"It may be that short-term interest rates being at such low levels mean that we are likely to see a gradual improvement in the stockmarket through the first half of this year . . . that will help business and consumer confidence."

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