NAB Monthly Business Survey – September 2015

There was a partial recovery in business confidence in September as the Government’s leadership uncertainties were resolved, while financial market volatility and emerging market concerns have moderated from the heights of the previous month – although market concerns remain elevated.

By NAB Group Economics

Key Points

There was a partial recovery in business confidence in September as the Government’s leadership uncertainties were resolved, while financial market volatility and emerging market concerns have moderated from the heights of the previous month – although market concerns remain elevated. The business confidence index rose 4 points, to +5, which more than unwound last month’s decline, but is still well below the mid-year peak. Additionally, the improvement in confidence was not broad-based across industries, falling in mining, construction and finance.
Business conditions held steady at an above average +9 index points in September. By component, employment is finally improving, turning positive and increasing to its highest level since mid-2011. In contrast, both trading conditions and profitability eased back, although they remain at elevated levels. Services sectors continue to outperform, while mining and manufacturing were the only industries to report negative business conditions in September – although there was a notable deterioration in both retail and finance/ property/ business services. Leading indicators have been positive, although forward orders eased slightly in the month. Capacity utilisation has been trending higher, which augurs well for non-mining business investment and the labour market.
Overall, the business survey suggest a good degree of resilience in what appears to be a building non-mining sector recovery. This is particularly apparent in industries thought to be highly responsive to currency changes in the near-term, including personal and business services. Weak commodity prices and falling mining investment will remain a drag on economic activity and downside risks from offshore remain pronounced. However, we find it difficult to mount a case for further policy easing on purely domestic grounds and view market pricing for another 25bp cut over the coming 6 months as overly pessimistic.

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

Global growth remains sluggish and below trend and, unlike the IMF, our forecasts do not envisage much pick-up in the next couple of years. Although the emerging economies are still growing much faster than the big advanced economies (around 5% versus around 2%), the focus of market attention has been shifting toward the former as falling commodity prices, the prospect of higher US interest rates, a build-up in debt and uncertainty over the pace of Chinese growth weigh on sentiment. By contrast, growth in the advanced economies picked up in mid-2015 and there is much less market focus on the problems with the Greek economy. Commodity exporting economies and their currencies have come under more pressure as sluggish global growth and the Chinese industrial slowdown lowers global commodity prices, impacting incomes and exports in some big primary producers which are heavily exposed to foreign investor sentiment.

In Australia, the ongoing high level of business conditions and trend improvement in key leading indicators such as capacity utilisation supports our view that the gradual recovery in the non-mining economy is becoming more resilient. Low interest rates and the lower AUD are providing support, with strength particularly evident across services sectors of the economy, including but not limited to tourism-related activity. Our domestic forecasts are unchanged this month, with real GDP expected to expand by 2.4% in 2015/16 and 3.1% in 2016/17. The unemployment rate remains elevated for an extended period, but does ease to 6% by end 2015/16 and to 5¾ by end 2016/17, given the structural shift back towards more labour-intensive sectors. There remain clear downside risks from offshore, and weak commodity prices and falling mining investment will remain a drag. However, we find it difficult to mount a case for further policy easing on purely domestic grounds and view market pricing for another 25bp cut over the coming 6 months as overly pessimistic.

For further details, please see the attached documents.