Quarterly Business Survey – December 2014

Business confidence eased back in Q4, dropping below the long run average level. Sentiment and business conditions are generally consistent with a ‘patchwork’ economy. Outside of construction and services, conditions remain soft in all other industries.

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  • Business confidence eased back in Q4, dropping back below the long run average level. This is consistent with our monthly surveywhich showed a noticeable pull back in confidence during November. Nevertheless, conditions held up in the quarter, although this likely reflects a surprisingly strong October result that proved to be short lived. Firms expectations for future activity generally eased.
  • Sentiment and business conditions across both states and industries are generally consistent with a ‘patchwork’ economy. Services and interest rate sensitive sectors such as construction are outperforming, while the downturn in commodity prices and mining investment is evident in the survey responses of mining firms. Construction has been supported by strong investor demand, particularly in medium density housing, driven by low interest rates and foreign buyers. Outside of construction and services, conditions remain soft in all other industries
  • Large depreciation in the AUD took place during the survey period in December and was reflected in firms’ responses to questions on AUD impacts. When responding, less firms in import competing industries such as manufacturing reported negative effects from theAUD, although the proportions reporting negative impacts are still high in some industries. In contrast, industries with high import costs, such as wholesale, reported a larger impact. The biggest (positive) changes occurred in mining as depreciation helps to cushion the impact of sharp falls in commodity prices. Hedging remains the most common means of managing currency risk.
  • Forward orders improved marginally in the quarter despite a number of headwinds, although the level of orders remains subdued. Other leading indicators in the NAB Survey generally softened. Firms expectations for conditions in 3 and 12 months time both eased back, while capacity utilisation and ‘bellwether’ wholesale conditions deteriorated as well. Spare capacity is a constraint on non-mining investment, although capex expectations for the next 12 months suggest some pick up in spending to come. The most recent ABS Capital Expenditure Survey also suggests an increase in non-mining investment, but not enough to offset the unfolding ‘cliff’ in mining capex.
  • Product price inflation was subdued at an annualised rate of 0.5% (0.1% in the quarter), reflecting softer labour cost growth, which offset stronger purchase cost inflation. Retail prices eased modestly in the survey (in contrast to stronger core inflation reported by the ABS).

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