Monthly Business Survey – June 2014

Business confidence recorded an unexpected increase in the month, with firms apparently shrugging off the sharp deterioration in consumer confidence that followed May’s Federal budget. Firms are sticking to their expectation for stronger activity despite business conditions remaining

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Business confidence showing no ill effects from the government’s ‘tough budget’, rather improving in line with better business conditions (reflecting sales and profits) – albeit conditions remain sub trend. Most industries showed better outcomes but heavy lifting done by surge in construction. Employment and capacity utilisation, however, weakened significantly. The ‘bellwether’ sectors (wholesale, transport) are giving mixed signals, while forward orders suggest little fundamental change in activity. Inflation pressures remain muted. NAB forecasts unchanged with unemployment to reach 6¼% by late 2014. Rates still expected to be on hold till late 2015.

  • Business confidence recorded an unexpected increase in the month, with firms apparently shrugging off the sharp deterioration in consumer confidence that followed May’s Federal budget. Firms are sticking to their expectation for stronger activity despite business conditions remaining below long-run averages and no change to forward orders. Stronger sales are contributing to elevated confidence levels, with the survey suggesting this has encouraged firms to invest and rebuild their inventories. However, capacity utilisation eased further from relatively low levels.
  • Business conditions rose in the month to their highest level since January, ending the downward trend that emerged since the start of the year. Nevertheless, conditions remain below the long-run average for the monthly series, which along with soft conditions in wholesale (a bellwether industry), suggests little momentum for domestic demand in the near term. Although conditions improved for all industries, levels vary significantly – service industries remain the stand out, followed by construction (wholesale and manufacturing are weakest). Sales and profits are stronger, but employment is yet to respond.
  • Our wholesale leading indicator suggests weak underlying conditions, pointing to further below trend economic growth in the second quarter of 2014 – and little near term improvement in prospect in demand.
  • Firms continue to report relatively benign inflation pressures, assisted by lower purchasing costs inflation and relatively low labour cost pressures. Retail inflation accelerated, but remains at low levels.

Implications for NAB forecasts (See latest Global & Australian Forecasts):

  • Moderate global growth continues after early 2014’s slowing, resulting in slightly lower growth forecasts in 2014 but nearer trend in out years. Mixed picture among advanced economies as US & Euro-zone growth disappointing expectations but UK expansion stays solid & Japan has coped with April’s tax hike better than some feared. Mixed picture in emerging economies too as trend slowing in China continues, other East Asian economies & Latin America stay sluggish & India disappoints.
  • Australian forecasts unchanged: business confidence still unaffected by Budget, conditions better but still below average, but employment down & forward indicators soft. Cash rate on hold until late 2015; unemployment to edge up. Domestic indicators continue to point to jobless growth and no certainty that declining mining investment will be replaced quickly. Retail looks softer and property (price) market seems near a plateau. While the degree of fiscal retrenchment is still uncertain, consumers are clearly unsettled and that in turn could produce a slow negative burn on demand (and ultimately business outcomes)

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