Business conditions ease in August


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By CommSec

NAB Business Survey; Weekly Consumer confidence

  • Business survey: the NAB business conditions index eased from +8.9 points to +6.5 points in August (long-term average +4.8 points). The business confidence index rose from +4.2 points to +6.5 points (long-term average +5.7 points). The survey was conducted from August 22-26.
  • Consumer confidence: the ANZ/Roy Morgan consumer confidence rating rose by 3.3 per cent last week.
  • RBA Speech: Reserve Bank Assistant Governor, Christopher Kent, has delivered an upbeat assessment of the economy.

What does it all mean?

It would have been more surprising if confidence had fallen in the past week rather than risen. Sure, US shares slumped on Friday night, but most Aussies still would have had ringing in their ears the news of the country’s record 25 years economic expansion.

The four-week average of confidence stands at the highest level in almost three years. But while consumer confidence is generally good, the sharemarket volatility in the past few days would have partly tarnished the result. Consumers will continue to spend – but cautiously.

The Reserve Bank’s Christopher Kent is by no means gloomy: “If commodity prices were to stabilise around current levels, that would be a marked change from recent years. Also, the end of the fall in mining investment is coming into view. The abatement of those two substantial headwinds suggests that there is a reasonable prospect of sustaining growth in economic activity, which would support a further gradual decline in the unemployment rate. There is also a good prospect that the growth in wages and the rate of inflation will gradually lift over the period ahead.”

Aussie businesses are still feeling the effects of the Brexit vote and the Federal Election. Those two events led to a loss of economic momentum over May-July. In line with anecdotal evidence of a recovery, businesses are more confident on the future, but it hasn’t kicked through yet into actual stronger business activity. Importantly, both business confidence and conditions are above longer-term averages.

What do the figures show?

National Australia Bank Business Survey:

  • The NAB business conditions index eased from +8.9 points to +6.5 points in August (long-term average +4.8 points). The business confidence index rose from +4.2 points to +6.5 points (long-term average +5.7 points). The survey was conducted from August 22-26.
  • In rolling annual terms, the business conditions index rose from +9.7 points to fresh 8-year highs of +9.9 points.
  • Components. The index of trading conditions eased from +15.2 points to +12.3 points; employment eased from +4.5 points to +4.0 points; profitability eased from +7.5 points to +4.0 points; forward orders rose from +2.3 points to +2.5 points.
  • Inflationary indicators were generally higher in August. The monthly reading of labour costs rose at a 0.7 per cent quarterly rate in August, after a 0.6 per cent lift in July. Purchase costs rose at a 0.4 per cent quarterly rate in August, after a 0.3 per cent rise in July. Final product prices were up by 0.2 per cent in August, after a similar rise in July. But retail prices were up just 0.1 per cent in August after a 0.8 per cent gain in July.
  • Capacity utilisation eased from 81.5 per cent to 81.0 per cent – in line with the long-term average.
  • The proportion of firms reporting that they did not require credit fell from around 78 per cent to 49 per cent in August.

Consumer confidence:

  • The ANZ/Roy Morgan consumer confidence rating rose by 3.3 per cent to 118.1 in the week to September 11. Confidence is up 12.2 per cent over the year and well above the average of 112.4 since 2014. Four of the five components of the index rose in the latest week:
  • The estimate of family finances compared with a year ago was up from +10 to +12;
  • The estimate of family finances over the next year was steady at +27;
  • Economic conditions over the next 12 months was up from -6 to +2;
  • Economic conditions over the next 5 years was up from +5 to +10;
  • The measure of whether it was a good time to buy a major household item was up from + 35 to +40.

What is the importance of the economic data?

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications for interest rates and investors?

Confidence levels are up – now we need to see that translate into higher spending, employment and investment. Rate cuts remain on the agenda but the latest data doesn’t advance the case for more cuts. In fact the optimism expressed by Christopher Kent on wage and price increases tends to downplay rate cut hopes.

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