March 8, 2016

NAB Monthly Business Survey – February 2016

Improvement in business conditions adding to evidence of a buoyant non-mining recovery. Business confidence also resilient despite global uncertainty

The latest Survey confirms continuing non-mining momentum in early 2016, with service sectors generally driving the improvement to date. In contrast, the outlook for the global economy remains downbeat and there is still much fear of contagion. Against that, the key drivers of local strength remain intact (especially low rates and a more competitive currency) and hence our view of the Australian economy outlook is unchanged – with continuing non-mining strength and increasing non-mining investment.

Improvement in business conditions adding to evidence of a buoyant non-mining recovery. Business confidence also resilient despite global uncertainty

The NAB Monthly Business Survey recorded a rebound in business conditions during February, suggesting the non-mining recovery has not wavered. Business conditions hit a level that is well above the long-run average, following big improvements in the major mining states of Western Australia and Queensland, as well as more moderate increases in NSW and South Australia. Business confidence did not appear to reap the benefits of higher conditions, but has remained encouragingly resilient in light of global volatility and concerns over emerging markets.

“Another above-average outcome for business conditions is a great result in the current global environment. It confirms that low interest rates and a more competitive AUD are clearly having the desired effect” said Mr Oster. Overall business conditions rose by 3 points to +8 index points in February, above the long-run average of +5. This included improvement in all three components (trade, profit and employment).

By industry, services remain the clear out performers in terms of business conditions, while mining, manufacturing and wholesale lag behind. However, conditions in both mining and wholesale still managed to bounce back from large declines last month. Elsewhere, construction also improved, consistent with ongoing strength in the residential sector, while retail conditions jumped as well. According to Mr Oster, “the service sectors have very much stepped up and are now driving an impressive rebound in non-mining domestic demand”.

Business confidence has been relatively steady in recent months, with resilient domestic factors helping to offset concerns on the global stage. Business confidence remained at +3 index points in February, and while this is slightly below average, positive business conditions are encouraging in the current environment. Mr Oster says that, “with global market volatilities starting to abate as well, positive confidence levels suggest the risk of contagion from financial markets has probably fallen compared to recent months”.

Additionally, it is interesting to note that despite below-average business confidence, there was a strong kick-up in reported capital expenditure by firms in the survey. This, together with strong profits and falls in spare capacity, suggest that prospects for business spending and employment are improving. “Business investment is critical to future economic growth, so we are constantly looking for signs that non-mining investment is starting to fill the void left by mining projects. We are finally starting to see signs of that happening” said Alan Oster.

In light of today’s survey results, we have not changed our view of the Australian economy outlook – and especially continuing non-mining strength. That means monetary policy should remain on hold for an extended period (rather than the market expectation for another cut by year end). However, much still depends on global uncertainties and whether global contagion ultimately weakens momentum in the domestic non-mining sector – and hence unemployment. AUD strength is another risk.

See the full report for details.

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