January 25, 2016

Monthly Business Survey – December 2015

Business confidence resilient to financial market turmoil (for now). Business conditions suggest non-mining recovery remains on track

Recent financial market turmoil highlights the risks to the outlook, but has not fundamentally changed our view of the Australian economy. Business conditions are well above average in fundamental (trend) terms, and business confidence has been surprisingly robust in the current financial environment. Positive business conditions in most industries suggests a relatively broad based recovery outside the mining sector (services leading the way).

Business confidence resilient to financial market turmoil (for now). Business conditions suggest non-mining recovery remains on track

In light of recent financial market turmoil, today’s NAB Monthly Business Survey provides a timely indication of how market movements have so far affected business sentiment. While business confidence took a step back this month, the index remained encouragingly resilient – and positive – with the index only falling from +5 to +3.

According to NAB Group Chief Economist Alan Oster: “While recent big declines in oil and equity markets highlight potential risks to the global outlook, relatively positive business conditions appear to have, so far, acted to reassure business sentiment”.

Indeed, the survey continues to show business conditions at quite elevated levels, despite also easing a little in the month. The NAB Business Conditions Index fell to +7 points over the period (from +10 in November), which is still above the long-run average of the survey (+5 points).

Mr Oster noted that we take some comfort from the result, stating that “this outcome suggests there are no real signs (beyond normal monthly volatility) that there is a fundamental weakening in the non-mining recovery”. In saying that, Mr Oster points out that resilience in both business confidence and conditions needs to be maintained over coming months if the non-mining recovery is to remain on track.

Across industries, it is still the services sector that is most enjoying the benefits of AUD depreciation and lower interest rates. Both personal and professional/business services have been consistent outperformers for a number of months. There was, however, a particularly large contraction in business conditions for retail and construction, both of which have been a notable source of improvement in the survey over recent years.

“Falling mining investment is still having an effect on construction, but we are also likely witnessing some loss of momentum in these industries as residential property markets start to cool” said Mr Oster.

NAB’s measure of capacity utilisation fell again last month (to 80% from 80.8%), despite elevated trading conditions. The decline in capacity utilisation was particularly heavy in personal services and retail.

“Capacity utilisation declined last month, but the trend still remains reasonably positive. We would need to see further declines before it poses a significant hurdle to future business investment” said Mr Oster. Also it was notablethat forward orders improved, adding to hopes of a near term lift in the domestic business environment.

financial market volatility translates into substantive negative real economic outcomes offshore, NAB expects the RBA will remain on the sidelines and observe developments, while continuing to focus on solid momentum in non-mining economic activity. Today’s survey results demonstrate the resilience of the non-mining recovery.

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