June 10, 2015

Australian Markets Weekly: NAB Survey boosted by Budget

NAB Business Survey for May was a positive start to this week’s data set that culminates in Thursday’s Labour Force report for May.

  • May NAB Business Survey was a positive start to this week’s data set that culminates in Thursday’s Labour Force report for May 
  • The recent Federal Budget, the May rate cut, and signs of improved business activity had a positive impact on business confidence
  • Survey consistent with the economy continuing to transition towards the domestic economy
  • RBA done if forecasts borne out; NAB economy forecasts still consistent with an unchanged cash rate this year
  • This week: Consumer confidence measures, RBA Governor Stevens speaks tomorrow, labour force report Thursday and key China activity data for May also due Thursday.

NAB Business Survey for May was a positive start to this week’s data set that culminates in Thursday’s Labour Force report for May.

The recent Federal Budget, the May rate cut, and signs of improved business activity had a positive impact on business confidence – which moved up significantly in May from +3 to +7 index points. This is the highest level of confidence since August 2014. Confidence was significantly higher in retail/wholesale (possibly associated with expectations from the Small Business Package) and finance, business and property services. While the domestic economy was more optimistic, mining confidence fell significantly (to -30 points).

Confidence improving since the Budget

The pick-up in confidence could also reflect improved business conditions. Business conditions rose from +4 to +7 points in May (and the highest read since October 2014), further cementing the upward trend seen over recent months. All components of the conditions index (trading, profitability and employment) improved in the month, although a meaningful recovery in employment remains absent – the index is still negative.

Conditions vary greatly across industries and a number reported a deterioration – again the largest fall was in mining. Conditions remain most positive in service sectors.

The steady upward trend we have seen in recent months is a welcome sign that the non-mining sector may be improving in the face of policy adjustments and a lower currency. Low interest rates continue to support the housing sector and while momentum has slowed recently, housing continues to grow at a robust pace.

While consumption in the March quarter was very modest and retail sales have been subdued in recent months, both retail conditions and confidence improved notably in today’s NAB Business Survey.

A two speed economy, again

The survey also reported an improvement in forward orders, capacity utilisation and signs of rising business capital expenditure. Forward orders index was up to +2 points in May (from -1), and is now above its long-run average and suggestive of a modest pick-up in demand in the near term. Improved forward orders also coincide with a notable pick-up in capacity utilisation, to 80.8% (up from 80.1%) and high capital spending.

The capital expenditure index rose (up 4) in May to +10 index points – well above its long-run average level (+5). This suggests a stronger expansion of non-mining business investment (which has a larger weighting in the survey) than ABS data currently indicate. Note that the lower company size threshold for this NAB Survey is well above the upper limit of business that would qualify for the reduction in the company tax rate and the immediate write-off of $20,000 in capital expenditure announced in the Budget.

RBA done if forecasts borne out

We have fine-tuned but not fundamentally changed our forecasts: for financial year 2014/15 growth of 2.4% is now forecast (was 2.3%), while for 2015/16 GDP is forecast to expand by 2.6% (was 2.9%), increasing to 3.0% (unchanged) in 2016/17. The slightly stronger pace from late 2016 largely reflects faster exports as more resource projects come on stream.

Based on NAB’s forecasts for activity, the labour market and inflation, we see the RBA as finished cutting – though they could still cut if our (and their) forecasts are not achieved. We also see the next move in rates as up – but not till late 2016 (and with a lower end point for the cash rate of around 3.5%).

Today’s NAB Survey is entirely consistent with that steady cash rate outlook, the Survey pushing the prospect of another rate cut further away. Thursday’s labour market report for May will also be important in that respect.

NAB forecasts for the Australian and global economy, for interest rates and the Australian dollar are set out on page 4 of the Weekly.

Coming up this week in Australia

Locally, the May Labour Force report is a highlight. Ahead of then, RBA Governor Stevens is speaking to the Economic Society of Australia in Queensland on Wednesday. While no speech title is as yet available, Stevens’ speech is almost bound to have a strong economy focus given the audience and with this month’s Board meeting come and gone the market will be expecting to hear his latest views on the economy’s transition and growth prospects. As for other local data, there is also a weekly update from the ANZ-Roy Morgan consumer confidence survey out tomorrow as well as the monthly Westpac-Melbourne Institute Survey on Wednesday, surveyed this past week before and after the RBA steady rates decision that was in any event entirely expected. Both have seen some net improvement since the Federal Budget.

Then comes the Labour Force report for May, out Thursday at the usual 11.30 release time. Leading indicators of labour demand point to continuing and reasonably solid growth in employment in coming months. NAB expects to see net employment growth to 10K in May after last month’s flat result, just sufficient to see the unemployment rate remain steady at 6.2%. The market consensus is for a little more employment growth, a monthly gain of 15.0K and also an unchanged unemployment rate. Employment forecasts for May range from a low of -5K to +20K. The market consensus 15K gain should also see a steady unemployment rate. In our view, a weak employment result – at or below the range of expectations – would be the real surprise. If there is any risk, it is skewed to the mid-to-higher end given last month’s flat outcome.

Unemployment measures steadier recently

Note that as well as the headline unemployment rate, this mid-quarter survey also provides estimates of Australia’s labour under-utilisation rate, the rate that includes those strictly defined as unemployed as well as those working part-time looking for full-time work and those with a marginal attachment to the labour force. Someone without a job might for example not be “actively” looking for work in the survey’s reference period and thus be not unemployed in a statistical sense but are under-employed and thus in the broader definition.

In February, the under-utilisation rate was steady at 14.9%. Since then, the unemployment rate has been steady at 6.2%; an unchanged under-utilisation rate would be further confirmation that the economy is creating sufficient growth to arrest any further increase in the economy’s extent of labour market slack.

Key growth data for China due

After yesterday’s trade data and today’s moderate inflation reports for May, attention will turn to Retail Sales, Industrial Production, and Fixed Assets Investment, all out Thursday and will provide important reads on the pace of activity in the economy through the June quarter.

Chinese industrial activity slowing

The market consensus for all three key activity indicators expects steady annual growth in May pointing to some growth stabilisation in of Australia’s largest trading partner. We would note though that more often than not, industrial production growth has disappointed over the past six months. We also observed from yesterday’s Chinese imports data that the imports of some key resource commodities are well down on year earlier levels, consistent with a slower trend in industrial activity. Iron ore imports for example in May were down 11.6% in the month and were down 8.5% from a year earlier.

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