The most comprehensive survey of current performance as well as near-term and medium-term expectations of the non-farm business sector, based on a survey of around 1,000 small to large sized companies.

Despite better business conditions and improved confidence, survey still only suggestive of an economy growing at around trend. Forward indicators slightly better, implying a pick up in near-term demand.

• Business conditions strengthened in the December quarter, following a moderation in activity in the previous quarter, and were suggestive of an economy growing at around trend. The pick up in conditions in the quarter was attributable to broad-based improvements in profitability, employment and trading conditions. Forward indicators of near-term demand, including forward orders, stocks and capacity utilisation, all rose in the quarter, implying an expectation that domestic demand will strengthen a little in the first three months of 2012.
• Conditions improved across all industries, with the exception of mining, where they fell heavily (reflecting falling commodity prices), and recreation & personal services, where they were a touch softer. Conditions also strengthened across most states, with SA and WA the exceptions.
• The gap between weak & strong industries narrowed in the December quarter, largely reflecting a modest improvement in the poor performing industries – reflecting better sentiment and rates.
• Business confidence improved somewhat in the quarter, although it remains below the long-run average. This outcome is likely to reflect a number of factors, including the pick up in activity in the quarter, the relief of RBA rate cuts, and possibly some abatement of concerns about Europe.
• Business capital spending intentions (for the next 12 months) have eased over the previous two quarters, but are still positive across all industries, suggesting expected further moderate expansion in investment this year (ex mining). Short-term employment conditions are consistent with a fairly subdued labour market over the first few months of 2012. Longer term, employment conditions are expected to strengthen. Lack of demand is expected to remain the most constraining factor on profitability over the year ahead, while concerns about interest rates, wage costs, capital capacity and suitable labour remained fairly muted.
• Product price inflation continued to soften in the December quarter, recording annualised growth of just 0.6%. Retail prices were even more subdued, with no growth recorded over the second half of 2011. Labour costs growth eased slightly.

Implications for NAB forecasts:

• No change to latest Global and Australian forecasts (released 31 January) for activity. But as noted in our RBA commentary on 7 February, we now expect one further RBA cut in mid 2012 (May) to bring the cash rate to 4%. We then see rates unchanged until mid 2013 – when rates will be under upward pressure from the carbon tax and a strengthening labour market.

For further analysis download the full report.

• Quarterly Business Survey – December quarter 2011 (PDF)