Australia's Business Confidence Remains 'Flat' Despite Abbott's Tough Federal Budget

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Business confidence in Australia continues to remain "steady" in the face of the Abbott government's tough budget cuts and falling consumer confidence.

According to National Australia Bank (NAB)'s monthly survey, business confidence remained the same in May despite a federal budget that's widely blamed for the sharp decline in consumer confidence.

Alan Oster, NAB chief economist, said the result of the survey was "surprising" with many firms choosing to stay positive and upbeat.

Bank of American Chief Economist Saul Eslake said the economy is "not falling in a hole" despite the slump in consumer confidence. If consumer sentiment continues to decline, the economy may be affected. But Australian businesses hope consumer confidence will come out of that hole again.

The Westpac Melbourne Institute Index of Consumer Sentiment declined 6.8 percent in May to its lowest level since August 2011. Consumer index has remained under 100 points for the second consecutive month. This means majority of Australians feel less optimistic about the economy.

Following the days before the budget's release, Australia's consumer index has dropped in anticipation of the budget cuts. Westpac Chief Economist Bill Evans said the sharp decline in index has left an "unfavorable" reaction toward the federal budget.

Tom Kennedy, an economist for JP Morgan, was not surprised by the low consumer confidence. He said only a few were spared from the federal budget as the government announced cuts in spending for health, education and welfare. Kennedy noted families are more likely to control their spending in response to the Abbott government budget reduction.

According to reports, business conditions dropped slightly in May due to "soft" profits and employment. Eslake said "very few" of the changes in budget impact businesses. Consumers feel the more adverse effects of the budget. He said the business environment is more aligned with the government.

In April, the International Monetary Fund has downgraded its growth forecast for Australia for two years from 2.6 percento in 2014 and 2.7 percent in 2015 since October 2013.

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