Key Points:

• The recent Federal Budget and interest rate cut appears to have had a positive impact on business confidence – which moved up significantly in May – from +3 to +7 index points. This is the highest level of confidence since August 2014 and has helped to turn the trend more positive. Confidence was significantly higher in retail / wholesale (possibly associated with expectations from the Small Business Package) and finance, business and property services. Mining confidence, on the other hand, fell significantly (to -30 points).

• The pick-up in confidence could also reflect improved business conditions. Business conditions rose from +4 to +7 points in May (and the highest read since October 2014), further cementing the upward trend seen over recent months. All components of the conditions index (trading, profitability and employment) improved in the month, although a meaningful recovery in employment remains absent – the index is still negative. Conditions vary greatly across industries and a number reported a deterioration – again the largest fall was in mining. Conditions remain most positive in service sectors. The ‘bellwether’ wholesale industry improved, but remains weak (transport was weak also). Encouragingly, leading indicators such as forward orders improved, as did capacity utilisation and capex spending.

• On the economy we have fine tuned but not fundamentally changed our forecasts. The big picture is still one where the domestic economy is struggling to offset the impact of sharply lower mining investment – as again highlighted in the Q1 National Accounts. While there has been some improvement in recent data, capex expectations in the non-mining sector have weakened, businesses remain reluctant to employ and consumers remain cautious. With future domestic demand still weak, unemployment is expected to rise a touch to around 6.4% by the end of 2015 and remain relatively high for some time. Our forecasts suggest the RBA is finished cutting. We see the next move in rates as up – but not till late 2016 (and with a lower end point for the cash rate of around 3.5%).

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

• There was no evidence of an acceleration in the pace of global growth in early 2015. Weak GDP results in the US, UK and Canada outweighed a pick-up in Japan and the Euro-zone and similarly mixed trends among the big emerging economies saw China slowing, India picking up and Brazil still very weak. The monthly manufacturing output and world trade numbers were soft, particularly the latter, and the business surveys do not show any clear evidence yet of an imminent lift in growth momentum. Our forecast is for more of thesame this year with global growth staying around 3¼% in 2015, followed by a modest upturn in 2016 (largely driven by the US).

• We have fine tuned but not fundamentally changed our forecasts– 2014/15 2.4%(was 2.3%), 2015/16 2.6%(was 2.9%) and 3.0% (unchanged) in 2016/17. The big picture is still one where the domestic economy is struggling to offset the impact of sharply lower mining investment – as again highlighted in the Q1 National accounts. Subsequently there has been some improvement in recent short term data – especially the May Nab survey which suggests business confidence improved post the Budget and rate cuts – as did business activity, capex spending and capacity utilisation. Against that, capex expectations in the non mining sector has weakened, business remains reluctant toemploy and consumers remains cautious. With future domestic demand still weak, unemployment is expected to rise a touch to around 6.4%by end 2015 and remain relatively for some time. Based on our forecasts for activity, the labour market and inflation, we see the RBA as having finished cutting – albeit that depends on ( our and the official family’s) forecasts being achieved. We see the next move in rates as up – but not till late 2016 ( and with a lower end point for the Official Cash rate of 3.5%).

For further details, please see the attached documents.

• Monthly Business Survey – May 2015 (PDF, 191KB)

Also available:

• Global & Australian Forecasts – June (PDF, 561KB)