Business conditions more subdued in April but confidence up marginally – shrugging off ‘tough budget’ rhetoric. Sales eased slightly, employment slightly better but still soft, profits weaker. Conditions remain volatile and mixed across industries: ‘bellwether’ sectors (wholesale, transport) still soft with near term conditions likely to remain sluggish – forward orders fell sharply. Inflation pressures relatively muted, but retail prices accelerated. Tomorrow’s Budget to show lower growth outlook with fiscal headwinds. We now expect Q1 GDP to be stronger (mainly net exports) and unemployment to peak marginally lower, prompting us to drop our call for a rate cut in November (subject to Budget). Rate rises not till late 2015.

• Business confidence lifted slightly in April, returning to long-run average levels after hitting a post-election low last month. The rise in confidence was a little surprising given negative rhetoric about a ‘tough budget.’ Other leading indicators in the survey still soft and seemingly not the source of better sentiment. Broader macro indicators are looking a little more positive – including the labour market – and may be helping confidence, which is highest in finance/ property/ business and retail.

• Business conditions dipped slightly in the month, continuing to point to a sluggish recovery in business activity. Conditions varied significantly across industries: looking through the monthly volatility, wholesale and mining continue to face the biggest challenges. Wholesale conditions improved strongly but remain at soft levels – a concern for this bellwether industry. Recreation & personal services remain strongest in trend and actual terms. Forward orders fell sharply, employment remains soft, sales eased (still positive) and profits fell (now negative).

• Our wholesale leading indicator suggests much weaker underlying conditions, pointing to further below trend economic growth in the first quarter of 2014, remaining soft into Q2 (at around 2¾%).

• Inflation pressures remain generally soft again in the month due to lower labour cost pressures. However, purchase costs picked up slightly, while retail prices strengthened.

Implications for NAB forecasts (provisional: updated forecasts in our Budget report tomorrow night):

• Going into the Budget, we now expect GDP growth at 2.9% in 2013/14 (was 2.7%) and 3.1% in 2014/15 (was 3.0%). That fundamentally reflects a stronger net exports contribution in Q1. GNE in the next two financial years remains at a very subdued 1%. Underlying CPI 2.7% through 2013/14 (was 2.9%) and 2.3% through 2014/15 (was 2.2%). Unemployment is now expected to reach 6¼% by end 2014 (was 6½%). That, plus the RBA’s reluctance to cut further, underpins our rate call change. We see the Commonwealth budget in structural deficit for some years with fiscal restraint imposing headwinds for several years — the extent of restraint may require post-Budget adjustments to our forecasts. We are currently expecting a fiscal contraction of around ½% per annum over the next 4 years. Global GDP growth unchanged at 3.5% in 2014 and 3.8% in 2015

For further analysis download the full report:

Monthly Business Survey – April 2014 (PDF, 268KB)