Monthly Business Survey – May 2014

Business confidence survived the government’s ‘tough budget’ intact, but business conditions eased again (reflecting sales). Employment and profits were steady at soft levels. Conditions are mixed across industries, but are generally negative outside of services

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Business confidence survived the government’s ‘tough budget’ intact, but business conditions eased again (reflecting sales). Employment and profits were steady at soft levels. Conditions are mixed across industries, but are generally negative outside of services: ‘bellwether’ sectors (wholesale, transport) still soft, but forward orders bounced-back from last month’s drop. Inflation pressures muted, including lower retail prices, allowing the RBA to maintain accommodative policy. NAB forecasts marginally higher with unemployment to reach 6¼% by late 2014. Rate rises not till late 2015.

  • Business confidence was unchanged in the month, at around long run average levels. That result was surprising, with firm’s still discounting persistently soft levels of business conditions and the negative sentiment surrounding the Federal budget – including the post-budget collapse in consumer confidence. Against that business was relatively sheltered from the Budget. Some leading indicators from the survey improved (especially new orders), but generally remain soft. However capital spending plans remain subdued and capacity utilisation broadly unchanged at relatively low levels.
  • Business conditions dipped slightly again in the month, revealing an emerging trend lower since the start of the year. Together with the poor conditions reported by wholesale – a bellwether industry – it suggests little scope for improvement in domestic demand. Conditions varied significantly across industries: looking through the monthly volatility service industries remain the stand out performers, while most other industries are reporting negative conditions (the weakest being mining). Employment and profits remains soft (the latter is negative), while sales eased (still positive).
  • Our wholesale leading indicator suggests much weaker 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 and relatively low labour cost pressures. Retail prices also eased.

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

  • Global growth leveled off through late 2013 and early 2014, partly due to bad weather hitting North America. Advanced economy upturn looks set to continue on low interest rates and with the peak in fiscal consolidation now passed. Mixed picture among emerging economies with China gradually slowing while India may improve on current poor performance. Europe and USA revised down in 2014. Global growth around 3.4% in 2014, slightly above next year.
  • Australian forecasts revised up slightly (history stronger – largely net exports) with no more rate cuts expected, but unemployment to edge up, peaking at 6¼% in late 2014. Dwelling investment and exports likely to strengthen, but consumption weak and non mining investment still showing no signs of filling in the mining investment gap. Critically we see domestic demand no better than 1% in 2014 and less in 2015. Forward indicators still weak and a tight Budget add to mining headwinds. Overall GDP to grow at 3.0% (was 2.9%) in 2013/14 and 3.3% in 2014/15 (was 3.1%) but structural challenges to demand remain considerable.

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