Business conditions now the weakest in three years: mining and construction down sharply. Confidence falters on global Greek exit fears, weak orders and negative reaction to the May Budget. Indicators of demand imply softer near-term activity and more jobs shedding in weak sectors. RBA to cut again in coming months.

•  Business confidence deteriorated sharply in May, with businesses now expecting weaker near-term activity, despite a 50 bp rate cut early in May and 100 bps of cuts over the six months to May. Rather, businesses appear to have been concerned about euro-zone and global growth issues. The Commonwealth May Budget was viewed very unfavourably by businesses (see special section on page 8).
•  Business conditions fell heavily in May, following declines in activity in April. The deterioration in activity was broad based across industries and across trading, profits and especially employment. The significant deterioration in employment, a lagging indicator of demand, suggests the weakness in activity has begun to bite and employers are preparing for a more subdued outlook as forward orders and stocks trend lower, and capacity utilisation remains worryingly low. Overall, the survey implies underlying demand growth in the June quarter may slow to around 3%, while GDP growth may slow to around 2%.
•  Conditions deteriorated across most industries in May, with particularly sharp declines in mining – on the back of very sharp commodity price falls and continuing industrial disruption – construction and retail. Conditions are worryingly subdued in construction, largely reflecting weakness in residential building activity. Conditions also deteriorated further in retail and remain poor in manufacturing – despite the depreciation of the AUD and the RBA’s rate cut. Conditions deteriorated across all mainland states except Victoria, with WA and SA now the only states to report positive activity in the month.
•  Lower interest rates may be encouraging stronger demand for credit, with the proportion of respondents reporting a need for credit rising to 53% in May, from 31% in April.
•  Labour costs growth ticked down in May, consistent with the deterioration in employment conditions, as did purchase costs growth. While product prices growth picked up marginally, economy wide inflation remains very subdued. Similiarly, retail prices barely suggesting further discounting, and low core inflation.

Implications for NAB forecasts

•  While the global outlook shows signs of softening as the latest round of Euro jitters hits confidence and financial (and commodity markets). However, provided politicians can avoid the worst (Euro-zone collapse, excessive fiscal austerity in the US) the outlook is still for global growth to heading back toward trend– global forecasts are 3.2% in 2012 and 3.7% in 2013.
•  We have upwardly revised our 2012 Australian forecasts following the stronger than expected Q1 GDP growth. However, the near term outlook appears weaker than it did a month ago, on the back of weak commodity prices, global concerns, euro uncertainty and a very poor construction sector. The Survey implies significant subsequent softening in activity and the labour market. Our GDP forecasts are now 3.1% (was 23⁄4%) in 2012, and 3.3% (was 3.6%) in 2013. On interest rates, we still see one more cut on the back of slower near term growth and the possibility remains an extra 25 will be needed – if activity weakens even more than we expect. Core inflation (abstracting from the carbon tax) remain within the RBA’s target band, at 2.1% in 2012 and 2.5% in 2013.

For further analysis download the full report.

• Monthly Business Survey – May 2012 (PDF, 290Kb)
• Find out more about changes to the NAB Monthly Business Survey (PDF 188Kb)