Business conditions remain at low levels (marginally higher) with unchanged mediocre confidence levels. Conditions better in wholesale, manufacturing and construction, but mining worsens (capex at record low). Near-term demand to stay weak with forward orders, capacity utilisation and employment conditions still well below average levels. Any confidence gained from falling dollar and May rate cut have been undermined by domestic weakness. NAB activity forecasts broadly unchanged – a touch lower in out years. Currency forecasts somewhat lower.

• While the business environment improved a little in May, overall business conditions remained weak with the still negative reading implying further sluggish monthly activity. Broad-based improvements in profitability, employment and trading conditions helped to lift business conditions in the month, though each of these indicators remained well below their long-run averages. Despite improvements in conditions of some weaker industries (wholesale, manufacturing and construction), mining slumped heavily in May in line with the general softness in commodity prices and the weakness in mining capital expenditure, which reached a new low in the May survey. Forward indicators suggest near-term demand will stay weak.
• Business confidence remained poor in May, with mining still very pessimistic. A lower dollar and the RBA’s decision to cut the cash rate in May might have helped confidence in the month, but the weakness in the domestic economy appears to have provided some offset to this.
• Overall, the survey implies underlying demand growth and GDP (6-monthly annualised) of around 2½% in the June quarter. Our wholesale leading indicator suggests a modest improvement in near-term activity, at best.
• Labour costs growth edged higher in May, consistent with a slight up-tick in employment conditions. Prices (including retail) fell marginally, while modest growth in costs implies further compression of margins.

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

• The consensus view is that global growth should accelerate through 2013 as recessions end in Western Europe, Abenomics lifts Japanese growth, the US continues its moderate expansion and solid growth continues in the big emerging economies. So far data have not shown such a synchronised global upturn. We still expect global growth to be around trend next year but downside risks now more prominent.
• Evidence the slowing in labour intensive mining investment is well underway and weakness in gross national expenditure has led us to soften our medium-term GDP forecasts. We see GDP growth of 2.8% in 2012-13, softening to 2.3% in 2013-14. While a lower Australian dollar and rates should help to offset some of the impact on the Australian economy from structural adjustment, they will be insufficient to prevent unemployment from rising – we see unemployment exceeding 6% by the end of 2013 (5¾% previously) and remaining around 6¼% in the out years. We expect the RBA to cut again in November (with the lower currency giving the RBA time). However, stimulus could come earlier if the labour market weakens more quickly than anticipated. We have revised down our currency forecasts for the AUD/USD to 93c by end 2013 and 87c by late 2014.

For further analysis download the full report.

• Monthly Business Survey – May 2013 (PDF 280 KB)

Also released today:

• Global and Australian Forecasts