Business conditions remain very difficult and confidence stumbles after showing signs of recovery earlier this year. Despite less negativity in retail & manufacturing, activity still very poor and labour market showing new signs of weakness. Also no sign of upward momentum – with forward orders, capacity utilisation and employment all very subdued and weaker. Tomorrow’s Budget to show lower growth forecasts and a fiscal position still retarding growth. We still expect one more cut (November) but could come earlier.

• The business environment remained difficult in April, with business conditions improving only marginally, after slumping to the lowest level in almost four years in March. There were only modest improvements in trading conditions and profitability, mostly offset by worse employment conditions – the weakest in four years. Implied job losses were most prevalent in manufacturing, wholesale and now recreation & personal services sectors, (where labour cost pressures were highest). Persistent weakness in forward indicators of demand, combined with tight fiscal policy settings, imply little improvement in near-term activity – indeed suggest modest weakening.
• Business confidence was shaken in April, after showing signs of improvement earlier this year. The stumble may reflect business concern over weaker than anticipated growth in the US, China and Euro-zone, and falling commodity prices, which paint an uncertain picture for the near-term global demand outlook. This is consistent with a slump in mining confidence, now the lowest since the global financial crisis, with confidence also slipping across most other industries. That said, continued weakness at home also not helping – especially as forward indicators weaken.
• Overall, the survey implies underlying demand growth (6-monthly annualised) of around 2½% in the June quarter. Our wholesale leading indicator suggests no near-term improvement in already weak activity levels.
• Labour costs grew a little less strongly; given weak employment, this suggests wage pressure is resilient. Price inflation was very subdued, consistent with still poor trading conditions. Combined with modest costs growth, the survey implies further pressure on margins, especially in retail.

Implications for NAB forecasts (Updated forecasts will be released in our Budget report, to be released tomorrow):

• That said going into the Budget, we expect GDP growth locally at around 2¼% in 2013 (2.7% fiscal 12/13) and 3% in 2014 (2.6% fiscal 13/14). Core inflation is expected to be 2¼% by year end and 2.5% by end 2014. Unemployment is expected to be around 6% by end 2013 and remain around that level in 2014. We still see another rate cut by late 2013 (November) but further deterioration in the labour market could see earlier action and possibly more than one cut. We expect fiscal surpluses will be hard to achieve in the forecasting period – a very moderate surplus by 2014/15 would involve the fiscal stance detracting from growth in each of the next two years by around ½ point (cf 1½% in 12/13). Global GDP growth unchanged at 3¼% but risks to the downside are building.

For further analysis download the full report.

• Monthly Business Survey – April 2013 (PDF 279 KB)