Business conditions soften


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By CommSec

NAB Business Survey; Weekly Consumer confidence

  • Business survey: The NAB business conditions index fell from +10.9 points to +8.4 points in July (long-term average +4.9 points). The business confidence index rose fell +5.4 points to +3.8 points (long-term average +5.7 points). The survey was conducted from July 25-29.
  • Consumer confidence: The ANZ/Roy Morgan consumer confidence rating fell by 2.8 per cent to 114.7 in the week to August 7. Confidence is up 2 per cent over the year and well above the average of 112.4 since 2014. All five components of the index fell in the latest week.

What does it all mean?

From the outset it should be noted that despite the modest consolidation in confidence and conditions, Aussie businesses are in decent shape. Business conditions are still healthy, holding above “normal” levels. In fact in rolling annual terms conditions have hit fresh 8-year highs. Confidence levels have been a bit more mixed in past months.

There does seem to be a slight softness in activity levels and it was more obvious across the sub-indices – trading conditions, profitability, and forward orders – all recorded weaker results. In particular profitability fell to the weakest reading in 15 months. Hopefully with the election out of the way, and lower costs of borrowing, businesses can now get back to focusing on spending, employment and investment plans

Confidence levels have also tapered from a household perspective. It seems the Reserve Bank rate cut last week had an impact on consumer’s outlook on the economy. The rate cut to fresh record lows may have concerned some households - worried that the economy is in a far worse position. In fact the outlook for economic conditions over the next 12 months recorded the largest slide. It is important to realise the decision to lower interest rates was driven by the low inflation outcomes and to some degree the Reserve Bank was cutting rates from a position of strength – with the Australian economy still recoding healthy growth.

Interestingly the latest business survey suggests that inflationary pressures are rather mild, leaving the door open for the Reserve Bank to cut rates if they deem it necessary.

What do the figures show?

National Australia Bank Business Survey:

  • The NAB business conditions index fell from +10.9 points to +8.4 points in July (long-term average +4.9 points). The business confidence index fell from +5.4 points to +3.8 points (long-term average +5.7 points). The survey was conducted from July 25-29.
  • In rolling annual terms, the business conditions index rose from +9.9 points to fresh 8-year highs of +10.1 points.
  • NAB noted: “Signs of a broadening recovery in recent months have again become more obscure following sharp deteriorations in transport and wholesale (both down 18 points) – although a recovery in retail conditions (up 12) was encouraging. Other than retail, construction and personal services were the only industries to see a (modest) improvement (both up 1).”
  • Components. The index of trading conditions eased from +16.9 points to +15.9 points; employment rose from +4.2 points to +4.3 points; profitability fell from +11.8 points to +6.8 points; forward orders fell from +4.1 points to +2.3 points.
  • Inflationary indicators were more mixed in July. The monthly reading of labour costs rose at a 0.7 per cent quarterly rate in July, after a 0.9 per cent lift in June. Purchase costs rose at a 0.3 per cent quarterly rate in July, after a 0.7 per cent rise in June. Final product prices were up by 0.3 per cent in July, after a similar rise in June. And retail prices were up by 0.8 per cent in July after a 0.2 per cent fall in June.
  • Capacity utilisation rose from 81.2 per cent to 81.5 per cent, and remains above the long-term average of 81.0 per cent.
  • The proportion of firms reporting that they did not require credit held at around 78 per cent in July.

Consumer confidence:

  • The ANZ/Roy Morgan consumer confidence rating fell by 2.8 per cent to 114.7 in the week to August 7. Confidence is up 2 per cent over the year and well above the average of 112.4 since 2014. All five components of the index fell in the latest week:
  • The estimate of family finances compared with a year ago was down +13 to +10;
  • The estimate of family finances over the next year was down from +28 to +24;
  • Economic conditions over the next 12 months was down from +3 to -5;
  • Economic conditions over the next 5 years was down from +8 to +7;
  • The measure of whether it was a good time to buy a major household item was down from +38 to +37.

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?

The Australian economy did soften over the first half of 2016, however the economy remains in a solid position. Business conditions and confidence are healthy; the job market is well-balanced; and home building continues to be a key growth driver. The key ingredient now would be a lift in non-mining business investment.

The Reserve Bank will continues to debate the merits of further interest rates cuts given inflation remains tame. Despite low rates there are few concerns that consumers and businesses will go on a borrowing/spending binge.


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