• Business confidence remains resilient despite easing a little in August, supported by positive forward orders, subdued cost pressures and more stable consumer confidence. Positive business conditions are also helping despite falling back in the month. Confidence varies significantly across industries, with construction firms the most optimistic by a large margin.
• The jump in business conditions last month was surprising, so some payback in August was expected. The conditions index unwound most of July’s narrowly based gains –manufacturing, construction and retail fell most. Forward orders also eased, but remain at levels implying stronger Q3 demand.
• A sharp drop in profits and sales drove the unwinding in August, although both remain positive. The employment index was unchanged at low levels, conforming with expectations of a relatively jobless recovery. Capex, capacity utilisation and forward orders all improved over the past 12 months, but trend conditions in the ‘bellwether’ wholesale industry remain weak. Our wholesale leading indicator implies soft underlying conditions and below trend economic growth in Q3, with moderate near-term demand growth in prospect.
• NAB forecasts broadly unchanged following modest Q2 GDP growth (as expected). Rates still on hold till late 2015 –with the move then up . Only a sharp deterioration in the labour market (not expected) could see rate cuts.
  

Implications for Forecasts

• Disappointing global growth continued into mid-2014 with stagnation in the Euro-zone sparking deflationary concern and ECB action while Japanese demand is still struggling to recover from April’s tax rise. Solid economic upturns in the US, UK and Canada limiting the slowing in advanced economy growth while the anticipated softening in the emerging market economies is under way, pointing to another year of below-trend 3% growth. We still expect growth to accelerate to around trend through 2015 and 2016.
• Domestic GDP growth sub-par (0.5%) in Q2―with nominal GDP falling. Business conditions & confidence still positive but conditions give back most of August gains. Domestic forecasts revised marginally: 2014/15 2.9% (was 3.1%); 2015/16 3.4% (was 3.2%). Unemployment rate still to peak at 6½% by end-2014. Inflation at the bottom of the RBA target band. Cash rate still on hold until late 2015.
• Our model of 6-monthly annualised demand growth, using forward orders as a predictor, has been suggesting stronger growth than the national accounts in recent quarters. Nevertheless, applying trend forward orders for August to our model for Q3 (+2) suggests that predicted demand growth will strengthen a little. Similarly, business conditions over predicted GDP growth in Q2. Based on trend business conditions from the August monthly survey, our model implies slightly softer predicted GDP growth in Q3. Applying business conditions derived from our ‘wholesale leading indicator’ implies a smaller increase in GDP growth in Q3.
• Wholesalers made further progress in leaving behind the doldrums that have plagued the industry for the past 3-4 years. Wholesale conditions lifted into slightly positive territory for the first time since August 2012 (+1 points), although the trend remains weak (-6 points). Based on past relationships, wholesale conditions have been a reasonably good predictor of overall business conditions – exhibiting strong statistical evidence of a leading relationship (Granger causality). The measures have diverged since late last year as broader conditions improved, but the gap narrowed in August as wholesale lifted. This indicator predicts slightly softer business conditions in Q3 than the regular conditions index, but comes more into line in late 2014.

For further analysis download the full report.

• Monthly Business Survey – August 2014 (PDF, 281KB)

Also available:

• Global & Australian Forecasts – September 2014(PDF, 611KB)