Australian June Business Sentiment Rises on Rate Cuts

July 14 (Bloomberg) -- Australian business sentiment turned positive in June for the first time since December 2007, increasing central bank Governor Glenn Stevens’ scope to keep borrowing costs unchanged at a half-century low this year.

The sentiment index rose 6 points to 4, after holding below zero for the previous 17 months, according to a National Australia Bank Ltd. survey of more than 400 companies questioned between June 24 and 30, and released in Sydney today. A figure above zero shows optimists outnumber pessimists.

Rising business confidence adds to signs Australia’s economy may skirt the global recession, helped by government spending and Stevens’ decision to slash borrowing costs to 3 percent. The jobless rate rose less than forecast in June, consumer confidence jumped to the highest level since December 2007 and home-loan approvals rose for an eighth month.

Much of the improvement in sentiment can “be put down to the prospect that ‘Armageddon’ had been avoided,” said Alan Oster, chief economist at National Australia Bank in Melbourne. “Business conditions appear to have rebounded to a level roughly similar to that reported prior to the collapse of Lehman Brothers Holdings Inc. in September.”

The Australian dollar rose to 78.20 U.S. cents at 11:33 a.m. in Sydney from 78.15 cents just before the report was released. The two-year government bond yield climbed 2 basis points to 3.75 percent. A basis point is 0.01 percentage point.

Cash Handouts

Governor Stevens left the overnight cash rate target unchanged on July 7 for a third straight month after slashing the rate by 4.25 percentage points between September and April to spur consumer demand.

The government has also distributed more than A$12 billion ($9.4 billion) to households this year, boosting at retailers such as David Jones Ltd., and allocated A$22 billion to upgrade roads, railways, ports, hospitals and schools.

Sydney-based David Jones, Australia’s second-largest department store chain, said last month that earnings after tax will rise by between 20 percent and 30 percent in the six months ending July 25.

Gross domestic product unexpectedly expanded 0.4 percent in the first quarter from the previous three months as consumer spending and exports helped Australia avoid a recession, a report showed last month.

Rates Outlook

“With an economy holding up better than expected, we now see the Reserve Bank on hold,” National Australia’s Oster said. “Rate increases are clearly a story for the second half of 2010.”

Governor Stevens will increase the benchmark lending rate to around 3.75 percent by the end of next year, before pushing the rate to between 5 percent and 5.5 percent by late 2011, Oster added.

National Australia’s business conditions gauge, a measure of hiring, sales and profits, jumped to minus 2 points from minus 14.

“While the survey clearly points to much better-than- expected outcomes, the real question is whether this improvement can be sustained into the second half of 2009,” Oster said.

“It’s hard to see the pace of consumer spending being maintained in the face of less cash handouts, rising unemployment and the damage done to household balance sheets.”

GDP will shrink 0.5 percent this year, before expanding 1 percent in 2010, Oster predicts.