Monthly Business Survey – December 2012

Business confidence posts a sharp jump in December, but not so activity and forward indicators, which remain poor – particularly wholesale, manufacturing, retail and construction. Better external sentiment (temporary avoidance of the US ‘fiscal cliff’), strengthening in Chinese data

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Business confidence posts a sharp jump in December, but not so activity and forward indicators, which remain poor – particularly wholesale, manufacturing, retail and construction. Better external sentiment (temporary avoidance of the US ‘fiscal cliff’), strengthening in Chinese data and lower rates have all helped confidence. Despite this forward indicators point to a further slowing in Q1 growth.  Survey highlights weak core inflation. We still expect three rate cuts (starting in Feb) and growth of only 2% in 2013.

  • Business confidence improved considerably in December, after deteriorating to its weakest level since April 2009 in the previous month. Firms appear to have taken relief from a last minute agreement to delay the US ‘fiscal cliff’, while signs of strengthening in the Chinese economy have also helped. This, combined with another RBA rate cut in December is likely to have helped confidence.
  • Business conditions however remain poor – albeit a touch improved in December. Of greater concern is the weakness in forward indicators of demand: with poor forward orders; capacity utilisation and capex at depressed levels; and credit demand back to record low levels.
  • Wholesale business conditions collapsed in the final months of 2012 – to its lowest level in the history of the survey (since 1997). The weakness in wholesale conditions is a real concern as it appears to be a leading indicator of overall business conditions (see Box on this at page 3).
  • The slight tick up in business conditions in December reflected modest improvements in profitability and employment conditions, partially offset by a slight deterioration in trading conditions. Overall, the survey implies underlying demand and GDP growth in the March quarter of around 2¼% and 2¾% respectively – a further slowing in growth from already below trend rates.
  • Labour costs growth rose in December but remained fairly contained, purchase costs and product price inflation moderated slightly, all consistent very subdued on going inflation – now confirmed by the core CPI measures. Retail price growth in the survey remained soft overall.

Implications for NAB forecasts (See latest Global & Australian forecasts report also released today):

  • Financial markets have lifted as confidence builds on a global recovery. Central bank action in the Euro-zone, US and Japan has helped sentiment but growth to remain subdued in 2013 (3.3%) rising to nearly 4% (above trend) in 2014. Developed economies to strengthen from H2 2013 (with Europe starting to grow) but emerging market economies (especially China & India) to drive global growth. Possible upside risks in China and the US.
  • The Australian economy has softened, with leading indicators suggesting the first half of 2013 will be difficult. Near-term outlook very soft – GDP forecasts 2.0% in 2013 and 3.3% in 2014 (unchanged from 11 January). CPI inflation surprisingly low for Q4 2012. We see core inflation (inc. carbon) of 2.6% through 2013 and 2.8% through 2014. Downward demand and price pressures have shifted the balance of risks towards an RBA rate reduction in February (rather than March). But with unemployment rising to 5¾% by mid-2013, we still see the need for two additional 25 bp rate cuts – possibly in May and August, taking the cash rate to 2.25%.

For further analysis download the full report.