Australia: Business confidence continued to see support - NAB

Research Team at NAB, suggests that this month’s NAB Business Survey was undertaken right amidst the heightened uncertainty around the Brexit referendum, and ahead of the Australian Federal election.

Key Quotes

“Despite the disruptive nature of these events (evident in the financial market volatility following the Brexit vote), it was encouraging to see that business confidence continued to see support from consistently above average conditions in non-mining sectors. In fact, business confidence jumped in June to +6 index points, which is consistent with long-run confidence levels. While there is potential for the unsettled post-election political environment to have an impact on confidence, this month’s outcome suggests that firms remain more focused on economic conditions. In that respect, it was reassuring to also see an improvement in some of the leading indicators, including forward orders and capex – although capacity utilisation did ease back a little.

Business conditions lifted from their already elevated level in June, to +12 index points (from +10), which is around its highest since the GFC. Services remain the best performers, although retail pulled back considerably – consistent with a large drop in retail prices, which could reflect an escalation of competitive pressures in the sector. That is a surprising contrast to wholesale – sometimes considered a bellwether for the economy – which has been consistently improving of late. The rise in business conditions was due to a notable improvement in employment demand, although profitability also rose, while trading conditions were unchanged at very elevated levels. Employment conditions are now back above long-run average levels, suggesting solid near-term employment growth. Inflation measures in the Survey were broadly steady, although a drop in retail prices may have implications for CPI.

The overall narrative of the Survey has not changed, even in light of recent disruptions. The results point to further improvement in the non-mining economy in Q2, with growth potentially becoming more broad-based – although evidence is mixed. This will help counterbalance some of the mining sector headwinds to domestic demand, but is unlikely to be fully offsetting. While the RBA should be reasonably comfortable with the present state of economic conditions, they would also welcome the resilience of business confidence and business conditions in the wake of recent events that cloud the outlook. However, the view on inflation is arguably more important at this juncture, and the Survey is not suggesting any meaningful turnaround in near-term inflation pressures. These trends justify the highly accommodative setting for monetary policy, but while the August RBA meeting (post Q2 CPI) is likely to be ‘live’, current information suggest rates will remain on hold (although it is likely to be a close call).”