Business conditions stumble to weakest level in more than three years, with wholesale and manufacturing conditions especially subdued. Capex index points to further softening in business investment, credit demand fell to record levels, while forward looking indicators suggest Q4 clearly below trend. Confidence also edges lower. Activity forecasts unchanged but 25bp February rate cut on the cards, providing modest Q4 CPI.

• Business conditions fall further in October, recording their weakest outcome since May 2009. It is likely that persistently weak confidence is having a material impact on demand conditions in the economy at present.
• The softening in activity was driven by broad-based declines in employment, profitability and trading conditions. Conditions deteriorated heavily to very low levels in wholesale, manufacturing and construction while retail remained weak. Transport and recreation & personal services were fairly positive but mining softened. Conditions in Queensland are the lowest level since the 2011 floods and NSW is the weakest in 3½ years.
• Businesses were more downcast in October, with the pessimism particularly apparent in the mining and construction sectors. It appears that the RBA’s decision to lower the cash rate by 25 bps to 3.25% at its October meeting failed to improve sentiment, with firms instead likely to be focussing on the reasons for the rate change – a softening global economy, fiscal tightening, a soft labour market and high AUD.
• Consistent with fairly uninspiring activity readings, indicators of future demand (forward orders, capital expenditure and capacity utilisation) were poor and point to continued soft near-term demand. The survey’s capital expenditure index fell to its lowest level since August 2009, suggesting the brakes may be tightening on the business investment boom – especially mining. Overall, the survey implies a pronounced slowing in underlying demand and GDP growth in December quarter 2012, to around 2¾% and 2-2¼% respectively – clearly below trend.
• Labour costs growth eased again in October, consistent with a softening in employment conditions. Product prices growth remained subdued, while purchase costs pressures rose a touch. Retail prices growth was weak.

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

• Central banks in the advanced economies continue to provide policy stimulus to promote growth and their counterparts in the emerging economies have shifted from tightening to easing monetary policy. Nevertheless, the pace of global growth remains slow with the big emerging markets and the US driving most of the world’s output expansion. Global growth expected to rise from 3.1% in 2012 to a still sub-trend 3¼% in 2013.
• The Australian economy appears to have stumbled into Q4. Growth outlook unchanged; GDP forecasts 2.3% in 2012-13 (below Commonwealth Treasury and RBA’s 3%) and 3.0% in 2013-14 (in line with Treasury’s 3% and RBA’s 2¼-3¼%). Weighing on near-term activity will be slowing mining investment, a still high AUD, fiscal tightening and ongoing weak global economy. The path for inflation remains soft – notwithstanding the impact of carbon pricing on headline CPI in Q3 2012. We see inflation of 2.9% in 2012-13 (RBA 2¾%) and 3.0% in 2013-14 (RBA 2-3%). While CPI is expected to rise, we favour one more rate cut; 25 bps in February to mitigate weakness in near-term demand.

For further analysis download the full report.

• Monthly Business Survey – October 2012 (PDF 280KB)