Key Points:

• The exuberant readings on business confidence seen in recent months was pared back in July (from +8 to +4). While confidence eased in most industries, much of the change stemmed from mining and construction firms (which includes a large share on non-residential and engineering firms), suggesting an escalation in Chinese growth concerns could be putting firms on alert. Confidence fell back below the long-run average, although the confidence index remains positive and the trend has held up around average levels.

• Business conditions also dropped back, falling 4 points to +6 index points in July. Looking through the month to month volatility, however, both conditions and confidence are suggesting a turnaround in the non-mining economy. All three components of conditions (trading, profitability and employment) fell in the month, with trading falling the most (down 8) and employment dipping back into negative territory. But despite the falls, both trading conditions and profitability remain relatively elevated. Conditions vary greatly across industries, but the service sectors continue to outperform. The ‘bellwether’ wholesale industry remains at weak levels, although this could reflect an element of margin squeeze due to AUD depreciation rather than a sign of weakness in the broader economy – wholesale purchase costs have increase considerably. Other leading indicators – such as forward orders and capacity utilisation – generally eased.

• Our GDP forecasts are marginally stronger than last month, with growth of 2.8% in 2015/16 and 3.2% in 2016/17. Our unemployment rate forecasts are unchanged from a peak of 6¼% following revisions last month. The divergence between weak medium-term expectations (particularly for non-mining investment) and stronger short-term indicators has become more pronounced. The RBA is expected to remain on hold until late 2016, although is likely to retain an easing bias until the non-mining recovery is further entrenched.

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

• Global growth is running below trend and looks set to remain lacklustre, limiting the pace of expansion in commodity demand. Output has been growing faster recently in some of the big advanced economies (notably the US and UK) and the Greek crisis has had little impact on activity across the rest of the Euro-zone. Stagnation in growth across the emerging market economies, the principal drivers of recent global output expansion, is the main area of disappointment and reflects the sluggish growth in world trade volumes and falling commodity prices. The bursting of the share market bubble will probably only worsen China’s trend slowdown, recent Indian data is again disappointing and there is weakness across large parts of East Asia and Latin America –not a good environment for commodity prices.

• The Australian economic outlook remains mixed and patchy. Mining investment is declining sharply, public spending is limited and national income growth is weak amidst declining commodity prices. Meanwhile, monetary policy is highly stimulatory and the AUD is acting as a shock absorber, with tentative evidence of further recovery in non-mining activity. House prices are growing strongly, particularly in the eastern states, and consumer spending has picked up recently. Non-mining investment remains the missing ingredient – with firms demanding very high rates of return before investing – 13% according to our survey. Our GDP forecasts are marginally stronger than last month – 2.4% in 2014/15, 2.8% in 2015/16 and 3.2% in 2016/17 – with domestic demand weak and net exports making a large contribution. The unemployment rate hovers near the current 6¼% before easing slightly into 2016/17. With rates already low, this outlook is not sufficiently weak to prompt further monetary policy easing. Equally, expectations for elevated unemployment imply that rate hikes are unlikely until the recovery in non-mining activity is more entrenched (late 2016 on our view). Risks emanating from offshore are overwhelmingly to the downside, while stronger local data if sustained suggest some modest upside risk.

For further details, please see the attached documents.

• Monthly Business Survey –  July 2015 (PDF, 344KB)

Also available:

• Global & Australian Forecasts – August (PDF, 658KB)