Monthly Business Survey – July 2013

Business conditions remain at 4 year lows while confidence slumps to 8 month low – despite a falling AUD and lower interest rates. Conditions very poor in manufacturing, construction, mining, retail and wholesale; WA now the weakest state.

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Business conditions remain at 4 year lows while confidence slumps to 8 month low – despite a falling AUD and lower interest rates. Conditions very poor in manufacturing, construction, mining, retail and wholesale; WA now the weakest state. Forward orders, stocks and employment still very poor. Weaker AUD hurting wholesale and retail purchase costs but weak activity sees this reflected in lower profits not higher prices.

  • The weakness in activity that has persisted for several months continued in July, with business conditions unchanged at their lowest level since May 2009. Slightly better trading and employment conditions were offset by deteriorating profitability, with the latter index falling to a 4½ year low. Conditions were especially weak in manufacturing – despite the lower Australian dollar – construction, mining and retail (albeit the latter did see better sales in July). Forward indicators provide little hope that demand will improve in the near term, with forward orders, stocks and capacity utilisation all remaining well below long-run average levels.
  • Business confidence fell to the lowest level since November 2012, with a falling dollar and the lure of lower interest rates unable to lift the mood of businesses in July. Rather, it is likely that the weakness in business activity and profitability (via the inability to pass on higher costs) is the key driver of weaker confidence. Confidence also remains extremely poor in mining – with broader flow on implications in WA. Only retail/wholesale reported better confidence levels (on the back of better retail sales). It is also possible that uncertainty over timing of the Federal election kept businesses wary during the month (the survey was completed prior the election being called).
  • Overall, the survey implies underlying demand growth and GDP (6-monthly annualised) of around 2½% in the June and September quarters. Our wholesale leading indicator implies little improvement in near-term activity.
  • Labour costs growth surged in July, despite still weak employment conditions; the implementation of a higher national minimum wage on 1 July is probably largely responsible for this rise. Prices fell again (retail prices rose a touch), but purchase costs rose sharply in wholesale and retail possibly reflecting higher import prices.

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

  • Global forecasts remain unchanged (3% in 2013 and 3.6% in 2014). That said, business surveys and industrial data point to an upturn in growth in advanced economies, possibly heralding a shift in the drivers of growth away from emerging markets and towards advanced economies. While US growth is lower, an accelerating trend is expected to see “tapering” begin in coming months. Against that, business surveys, trade and industry data and GDP releases show a softening trend in the emerging markets – with China expected to slow further.
  • Further signs Australian growth is grinding lower. We see GDP growth softening to 2.2% in 2013, before rising to 2.6% in 2014, and a significant deterioration in the labour market is expected this year (unemployment above 6%) and next. Our forecasts have been revised a touch lower – with downside risks building. When combined with still low inflation, we expect another RBA cut, probably in November, and more cuts may follow. We remain a touch more bearish than recently revised (down) forecasts from the Government and the RBA.

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