Business conditions weaken; forward orders and other indicators of near-term demand still soft. Confidence slips further, with heightened European uncertainty seemingly outweighing relief provided from RBA rate cuts – new taxes may also be weighing on sentiment.

• Business conditions weakened in the June quarter, following modestly better activity over recent quarters. Official ABS data suggest the economy grew strongly in the March quarter; more recently, the economy looks to have weakened, with our survey implying a slowing in annualised GDP growth to just 2.6% (six-monthly) in the June quarter. Measures of near-term demand (forward orders, stocks and capacity utilisation) were subdued, implying soft near-term activity.
• While the divergence between the stronger mining and serviced-based sectors and the weaker consumer and trade dependant sectors narrowed a little in the June quarter – largely due to softening commodity prices – the multi-speed economy remained fundamentally intact. Conditions deteriorated across most industries, and were particularly weak in manufacturing and construction. In contrast, conditions were strongest in recreation & personal services, mining and transport & utilities. Despite falling heavily, conditions in WA were the strongest of the mainland states, while conditions were weakest in Victoria and Queensland.
• Business confidence deteriorated in the quarter to be well-below the long-run average. The cumulative 125 bps of cuts by the RBA since late last year does not appear to have fully offset heightened concerns about Europe. More businesses appear to be worried about the implications of the minerals resource rents tax (MRRT) and carbon tax, effective 1 July 2012.
• Business investment intentions (next 12 months) rose slightly, reflecting a pick up in non-mining capex intentions. Short-term (and longer-term) employment conditions eased and are consistent with our expectation for little near-term employment growth. Lack of demand is expected to be the most constraining factor on profitability over the year ahead, while concerns about interest rates, wage costs, capital capacity and suitable labour were low.
• Product price inflation was again subdued, recording annualised growth of just 0.5%, implying price pressures remain well contained. Retail price inflation was even weaker – essentially flat. Labour and purchase costs growth remained modest.

For further analysis download the full report.

• Quarterly Business Survey – quarter June 2012
• Changes to NAB’s Quarterly Business Survey (PDF, 132kb)