Strong dollar and weak demand chip away at confidence

The strong Australian dollar and a lack of demand in the non-mining sectors of the economy have resulted in business conditions and confidence weakening slightly in February following a rise in January.

The strong Australian dollar and a lack of demand in the non-mining sectors of the economy have resulted in business conditions and confidence weakening slightly in February following a rise in January.

Business conditions fell to -3, down from -2 in January, as firms recorded modest falls in profitability, although employment conditions improved, the National Australia Bank's monthly survey of more than 400 firms found.

"Perhaps most concerning is the slump in forward orders, with the index declining to its lowest level since May 2009," NAB chief economist Alan Oster said.

"Combined with still low capacity utilisation, stocks and employment and capital expenditure readings, forward indicators imply little improvement in near-term demand."

Conditions in the retail, wholesale, recreation and personal services sectors picked up, while mining activity lifted as commodity prices rose. Conditions in the construction and manufacturing industries remained poor. JPMorgan economist Tom Kennedy said the survey showed domestic conditions remained challenging despite an improvement in the global environment.

At the same time, the market continued to lower expectations of a rate cut next month. Markets were pricing an 18 per cent chance of an interest rate cut of 25 basis points in April, and a 75 per cent chance of a 25 basis points cut for the rest of 2013, Credit Suisse data showed.

Expectations of an interest rate cut for the rest of 2013 are at their lowest since August 2011, according to the Reserve Bank's interest rate swap rates.

NAB also revised its rates forecast to 50 basis points (for an official cash rate of 2.5 per cent) for the rest of the year, instead of cuts totalling 75 basis points.

Meanwhile, the retail sector was forecast to grow 2.2 per cent for the 2013 financial year after a disappointing 2012, as lower interest rates took effect, consumer confidence grew and households' savings rates levelled out, Deloitte Access Economics said in a report.

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