Monthly Business Survey – December 2013

Are we at a turning point? Business conditions jump to more than 2½ year high, while confidence broadly unchanged – both now near trend levels. Sales and profits up sharply – especially in wholesale, transport and services – reducing excess capacity slightly.

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Are we at a turning point? Business conditions jump to more than 2½ year high, while confidence broadly unchanged – both now near trend levels. Sales and profits up sharply – especially in wholesale, transport and services – reducing excess capacity slightly. Employment index better, but still imply flat job market. Soft forward indicators question the sustainability of the lift in conditions. Price inflation still moderate with margins under pressure as AUD increases input costs. Unemployment key to rate outlook. Domestic and global forecasts largely unchanged. But better near term business conditions and the CPI spike delays next RBA cut from May to late 2014.

  • Business confidence was broadly unchanged in December and is consistent with long run average levels. Confidence has remained surprisingly elevated following the post-election jump, and could potentially remain at these levels for longer than previously thought given that the conditions index has begun to respond. Confidence appears relatively even across industries and the mainland states (unlike conditions).
  • Business conditions jumped in December (up 7 points to +4 index points), moving more into line with confidence. Most industries recorded improved conditions for December – especially transport, wholesale and the services industries more generally – but, manufacturing and construction were both notable exceptions. The sustainability of the jump may be questionable given subdued forward orders, a run down in stocks (although this may be involuntary), and still low capacity utilisation. Employment conditions remain soft (-4 index points). Clearly the January reading (post seasonality) will give a better read on the growth momentum.
  • Our wholesale leading indicator suggests much weaker underlying conditions and suggests below trend growth continuing into the first quarter of 2014. Against that the improving trend in business conditions suggest a more optimistic outlook – implying underlying demand growth and GDP growth (6-monthly annualised) of around 3% in Q4, above our forecast.
  • Labour costs growth has held steady at restrained levels, consistent with increasing slack in the labour market. Similarly, subdued purchase costs have kept overall prices growth modest.

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

  • Global upturn continues and forecasts little changed. Advanced economies seeing recovery after their prolonged weakness post 2008/9 recession. Mixed trends across Emerging markets with gradual slowing inChinaand uncertainty over speed of Indian rebound. While growth in the big emerging economies still easily outpaces that of the G7 advanced economies, the latter are driving the forecast improvement in global growth.
  • More positive economic indicators for Australia hold out hope that a turning point may be near. However, the labour market is still weak and will remain a headwind as labour-intensive mining investment peaks. Other forward indicators generally still soft. Our forecasts are broadly unchanged: GDP for 2013/14 now 2.5% (unchanged) and 2014/15 now 3.0% (was 2.9%).  Unemployment rate still to peak at 6½% in late 2014. The combination of near term better business conditions and (especially) the unexpectedly strong Q4 underlying inflation print has caused us to move our next rate cut call from May to November. We do not expect a rate hike until late 2015.


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