Australia Business Confidence Falls to Lowest in 14 Months on Higher Rates

Australian business confidence slipped in July to the lowest level in more than a year, adding to signs higher interest rates are eroding domestic demand and driving the local dollar down by the most in almost two weeks.

The confidence index halved from June to 2 points, according to a National Australia Bank Ltd. survey of more than 400 companies between July 26 and July 30, and released in Sydney today.

Business sentiment has waned for a fifth straight month, particularly among companies not tied to the mining boom, underscoring the two-speed nature of the nation’s economy where retail sales, dwelling construction and lending have weakened. Central bank Governor Glenn Stevens kept the benchmark rate unchanged last week for a third month, on the weakest inflation in three years, after boosting borrowing costs six times between October and May.

“The prospects for domestic demand in the second half of 2010 have weakened significantly,” said Alan Oster, chief economist at National Australia in Melbourne. Slower economic growth “will need to be watched and in this environment inflation in the September quarter is unlikely to provide a ‘November trigger’” for an interest rate increase, he said.

Oster also said the central bank is unlikely to consider tightening monetary policy before February.

Dollar Falls

The Australian dollar fell the most since July 28 to 91.33 U.S. cents at 11:32 a.m. in Sydney from 91.41 cents just before the report was released. The two-year government bond yield dropped 1 basis point to 4.58 percent. A basis point is 0.01 percentage point.

Further evidence of weaker domestic demand may hamper Prime Minister Julia Gillard’s push to win Australia’s Aug. 21 federal election.

The ruling Labor government, campaigning on its record of helping keep the nation out of recession after the global financial crisis, remains locked with the rival Liberal-National coalition in opinion polls published in recent days.

The Labor Party was preferred by 52 percent of voters in a Newspoll survey published in the Australian newspaper on Aug. 9, compared with 48 percent who support Tony Abbott’s Liberal- Nationals. Voters favored the coalition 51 to 49 over the Labor Party, according to a Nielsen poll published in the Sydney Morning Herald on Aug. 7.

Government Spending

To spur the economy during the 2009 global recession, the government spent more than A$42 billion ($38 billion) on distributing cash to households and expanding schools, hospitals and roads. Most of that stimulus ended last year.

“The July survey points to construction coming under pressure as the fiscal stimulus fades, while retail has weakened further from already poor levels,” Oster said.

National Australia’s business conditions gauge, a measure of hiring, sales and profits, fell 3 points to 5 in July, today’s report showed.

While confidence rose last month among mining companies that are benefiting from China’s demand for energy, coal and iron ore, sentiment slumped among manufacturers, builders and retailers, today’s report showed.

“Consumer de-leveraging and uncertainty appears to be continuing,” Oster said.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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