Monthly Business Survey – February 2013

Business conditions & confidence both edge down in February. High AUD hurting manufacturing and lack of non-mining demand weighing on most sectors. Large falls in orders, poor capacity use, and weak capex plans (esp. mining) don’t augur well for near-term (weak) domestic demand.

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Business conditions & confidence both edge down in February. High AUD hurting manufacturing and lack of non-mining demand weighing on most sectors. Large falls in orders, poor capacity use, and weak capex plans (esp. mining) don’t augur well for near-term (weak) domestic demand. 2013 GDP forecasts up marginally (historical revisions). RBA still needs to ease further, but with early signs that lower rates are helping housing and consumers, we now expect another 50 bps of cuts (previously 75 bps).

  • Business conditions weaken a touch in February and still negative, suggesting an economy continuing to grow below trend. The tick down in activity entirely reflects a modest fall in profitability of firms, partly offset by an improvement in employment conditions. Perhaps most concerning is the slump in forward orders, with the index declining to its lowest level since May 2009. Combined with still low capacity utilisation, stocks, employment and capital expenditure readings, forward indicators imply little improvement in near-term demand.
  • While conditions remain difficult for many industries, especially construction and manufacturing, there are signs that consumers may have become less cautious in response to recent improvements in equity and housing markets, with recreation & personal services, retailing and wholesaling all improving in the month.
  • Business confidence eased in February and remains below long-run average levels. Nonetheless, the general mood is more upbeat than it was towards the end of 2012. The fall in sentiment was broadly based, especially in mining, wholesale and recreation & personal services. But finance/ business/ property bucked the trend.
  • Overall, the survey implies underlying demand growth (6-monthly annualised) of around 1½% in the March quarter i.e. well below trend. Our wholesale leading indicator suggests no near term momentum improvement.
  • Labour costs growth returned to levels reported at end 2012 – after very weak readings last month. Overall wage cost pressures are well contained at present. Price inflation remained very subdued, with the softness in inflation consistent with soft activity. Combined with a strengthening in purchase cost pressures, the survey implies further pressure on margins. This is particularly apparent in retail where prices were flat.

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

  • Financial markets have lifted as confidence in the global growth outlook has firmed but late 2012 data for world exports and industrial output remained soft, showing only modest expansion in activity. Business surveys suggest conditions will improve in several of the important advanced and emerging economies (notably the US, Germany, Brazil and India). We expect growth to increase modestly this year before accelerating in 2014.
  • While there are signs of improvement, the Australian economic outlook is still subdued. A high AUD, declining terms of trade and a large structural adjustment task will remain headwinds. Outlook a little stronger reflecting history: GDP growth to be 2.3% in 2013 (was 2.0%) and 3.1% in 2014 (was 3.3%). RBA now expected to cut by 50 bps in 2013 (possibly June & Nov). This reflects RBA’s “comfort” with current activity, signs previous cuts have gained traction in housing markets & retailing, and “so far” resilient labour market. But with weak underlying demand continuing, we still see unemployment rising to 5.7% by mid year, with little sign that non-mining investment will ramp up.

For further analysis download the full report.