The NAB Business Survey suggests some easing in conditions and (less so) confidence recently, but is not (yet) showing a negative impact on the non-mining sectors from recent financial market volatility and falling equity markets. However, the longer these uncertainties continue, the higher the risk that it will do so. For now, the Survey suggests there no fundamental change in our view of the Australian economy, with the recovery in the non-mining economy still strong. West Australian (and SA) conditions, however, have been crunched as the impact of the mining slowdown spreads.

Business confidence is sub-trend, but holding up reasonably well in the face of financial turmoil. Business conditions eased, but still consistent with non-mining recovery

Financial market volatility has persisted, raising the risk of an adverse impact on Australian business that could threaten the recovery seen in the non-mining economy. However, today’s NAB Monthly Business Survey suggests that business confidence – where the negative effects from financial markets are likely to be felt first – have held up reasonably well in the face of this uncertainty. The confidence index remained unchanged at +2 points in January.

According to NAB Group Economist Alan Oster, “Given all the volatility in equity and financial markets, this is yet another relatively good result from the Business Survey. It suggests things remain broadly on track for the non-mining economy”.

Nevertheless, even though confidence remains positive, the index has eased to levels that are below the long-run average. Mr Oster says that “there are competing factors at play here, with reasonably good domestic fundamentals helping to offset what could potentially be a big drag on confidence from global markets”. Estimates from NAB Economics suggest that under normal conditions, domestic fundamentals would suggest a confidence reading that is around 4-5 points higher than current.

Business conditions have held-up around long-run average levels, however, they have eased notably from the highs of 2015, in large part driven by a sharp deterioration in WA, and to a lesser extent SA. In contrast, business conditions remain much more elevated in NSW and Victoria, although both of these have eased modestly from their recent highs as well.

“Business conditions in mining have deteriorated to an eye watering -47 points, which is having a clear flow on effect to conditions in the major mining states” said Mr Oster. Overall business conditions fell only 1 point to +5 index points in January, equal to the long-run average.

Outside of the mining industry, conditions are relatively mixed, although much of the deterioration in January has come from wholesale, possibly reflecting AUD depreciation. Retail has also exhibited some unexpected weakness. In contrast, the transport industry appears to be seeing the benefits of lower oil prices, while the major services industries remain the clear outperformers. “Again, this outcome suggests fundamental conditions in the non-mining economy remain very resilient, and we have not changed our view of the Australian economy” said Mr Oster.

While the international risks have tilted to the downside, the central case for the Australian economy remains for a continuing strong recovery across the non-mining economy over the next two years. NAB expects the RBA will remain on the sidelines and observe developments, while continuing to focus on signals relating to non-mining economic activity. Today’s survey suggests the RBA still has sufficient breathing room.

For further analysis download the full report:

• Monthly Business Survey – January 2016 (PDF, 189kb)