Monthly Business Survey – December 2014

The survey again shows a patchwork economy with little-to-no momentum building. In December, conditions eased for the second successive month after October’s surprisingly strong result so they’re now a touch below the long run average.

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Key points:

  • The Survey again shows a patchwork economy with little-to-no momentum building. In December, conditions eased for the second successive month after October’s surprisingly strong result. As a result conditions are now a touch below the long run average. Additionally, forward orders fell back significantly (broad based) suggesting soft demand conditions will continue in the near term. On the other hand, levels of capacity utilisation edged up a touch. The fall in conditions was driven by all three components (sales, profits and employment), with employment the weakest and now below long run averages – again pointing to sub-trend employment growth. By industry, the deterioration was particularly pronounced in construction and mining.
  • Business confidence improved a touch, but was flat to one decimal point. More importantly confidence remains well below long run averages. Falls in commodity prices underlie substantial declines in mining confidence. Lower oil prices appear have contributed to a kick in optimism in transport/utilities firms (now the most confident). Most other sectors reported flat to improved confidence. As noted above, other leading indicators are not promising while the ‘bellwether’ wholesale industry remains very weak.
  • Moves in commodity prices produce a sharper “v” in our activity forecasts. Unemployment to continue to deteriorate but peak lower (6.6%) and later (Q4 2015). Still expect two rate cuts in 2015 but timing very dependent on data flow and could start a touch later.

Implications for forecasts:

  • Moderate sub-trend global growth continues with a diversity of economic conditions (solid expansion in US, UK, India and China, weakness in Euro-zone, Japan, Latin America). Falling oil prices should boost global activity, although the impact varies between oil exporting and importing countries. Our estimates are conservative but lower oil prices still boost our forecasts for the US, Japan, Euro- zone, India, China and non-Japan Asia while Russia and other big energy suppliers are revised down. Adding in the other (mainly negative) recent changes in the environment gives growth going from 3% last year to 3½% in 2015 and 2016.
  • Fully factoring in lower oil and other commodity forecasts have created a larger “v” in the shape of our activity forecasts – softer in the near term (2014/15) as iron ore/coal effects dominate but stronger in the medium term (2015/16) reflecting oil prices, rate cuts and marginally stronger MTP growth and exports. Cuts to national incomes and lower inflation are key short term outcomes. Core CPI 1¾% by Q1 2015. Unemployment to continue to deteriorate but peak lower (6.6%) and later(Q4 2015). Still expect two rate cuts in 2015 but timing very dependent on data flow and could start a touch later.

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