Interest rate concern – survey

Despite a 10-year high in business confidence, more than half of businesses in Western Australia believe another interest rate rise will take a toll on the state’s bustling economy, according to the CCI-BankWest survey of business expectations for the June 2006 quarter.

Of the 440 firms surveyed, 88 per cent believed the state’s economy would remain in a robust position over the next year, up 1 per cent from the March quarter, while 59 per cent of businesses believed another interest rate rise would affect their operation.

In a statement, BankWest chief economist Alan Langford said the next two quarterly consumer price index reports, due in July and October, were crucial to the interest rate outlook.

“With headline inflation already at the top of the Reserve Bank’s 2 to 3 per cent medium-term target and underlying inflation hitting 2.5 per cent around six months earlier than expected, another cash rate increase this year is more likely than not to occur,” he said.

Mr Langford said the RBA was torn between the imperative to limit the extent of further acceleration in key inflation measures without triggering a sharp drop in house prices or choking business investment, which was holding up the national economy in the face of an ongoing cyclical downturn in housing construction in eastern Australia.

Chamber of Commerce and Industry WA chief executive John Langoulant has said a further rise in interest rates in 2006 could affect business activity in WA.

“We are faced currently with considerable demand and cost pressures in our state,” he said. “While there are always downsides to any lift in interest rates, these pressures do have to be managed, and a further rate rise might put a brake on some of the cost growth.

“It is not a bad problem to have; of course it is better than the opposite, when there is not enough activity in the economy.”

The survey also revealed that 93 per cent, or 409 of the 440 respondents, thought current economic conditions were positive for their business, while 84 per cent reported positive trading conditions for the quarter – the highest level since the series began in December 1997.

On average, respondents were operating at 84 per cent of capacity this quarter, while 27 per cent are currently operating at 95 per cent of capacity or higher.

With cost pressures increasing, 60 per cent of businesses were preparing to lift their prices, compared with only a third of businesses preparing to do so in the March quarter.

A critical issue for most survey respondents was the labour shortage, with 71 per cent saying labour was scarce this quarter, compared with 65 per cent in the March quarter and 62 per cent in June 2005.

All of the survey’s indices of operating conditions increased during the June quarter, including turnover and profitability, which rebounded in spite of the high cost pressures.

Recruitment activity remained a priority now and in the future for those surveyed, with more than 35 per cent hiring more staff this quarter and more than 40 per cent intending to employ more staff in the next quarter.

This compares with only 10 per cent who shed staff during the June quarter and 5 per cent who intend to do so in the next quarter.