January 27, 2021

Monthly Business Survey: December 2020

Business conditions improve to multi-year highs.


Business conditions rose further in December to its highest level since late 2018 at 14pts. This marks a fourth consecutive month of improvement and, encouragingly, employment conditions are back in positive territory for the first time since the start of the pandemic. Business conditions are now well above average, suggesting there is strong momentum in Australia’s economic recovery. In contrast, business confidence fell back to 4pts, as confidence pulled back in NSW, Victoria and Queensland. In part, this likely reflects the impact of the Sydney COVID-19 outbreak through December. Elsewhere, capacity utilisation saw further gains and is now around its long-run average (and pre-virus levels), while forward orders pulled back but remain in positive territory. These leading indicators suggest the pipeline of work continues to build – pointing to an ongoing recovery in the months ahead. Most indicators within the survey are now broadly at or above pre-virus levels, with the exceptions being export conditions – no surprise given the pandemic continues to disrupt global trade – and capital expenditure. That said, capex has been recovering since reaching a trough in mid 2020 and, should conditions remain elevated, will likely turn positive again as businesses renew investment plans, especially given government tax incentives in place.

Business confidence fell 9pts to 4 index points in December, while business conditions rose 7pts to an above-average 14 index points, a level last seen in August 2018. By sub-component, the employment index drove the rise with a sharp turnaround, rising 13pts to 9 index points. Trading (up 5pts) also saw a solid gain in the month, while profitability edged (down 2pts). All three sub-indices are above average, for the first time since early 2019.

According to Alan Oster, NAB Group Chief Economist “Overall, another positive survey result, with business conditions rising to its highest levels since 2018. The improvement in conditions is broad-based and, importantly, driven by big move back into positive territory for employment conditions.”

“The rise in the employment index is very encouraging and is consistent with the big gains we’ve seen in the official jobs data.” said Mr Oster. “The gains have been seen across all states and notably, Victoria appears to have caught up with NSW and Queensland – great news for the state that has suffered an extended lockdown.”

Capacity utilisation has returned to around pre-virus levels, rising to 80.9% from 79.1% in December, following the further gains in businesses conditions.

“Capacity utilisation continued to recover with another solid gain. However, it also suggests that despite a large rebound over the last 6 months, we are not yet fully recovered.” said Mr Oster.

While the survey results are generally favourable, other indicators such as forward orders and capex remain subdued. Forward orders pulled back 5pts to 1 index point, capex remains in negative territory at -1 index point, despite rising 3pts.

“For some time we’ve been saying that employment and capex activity would lag a sustained improvement in conditions. In December, we saw employment conditions improve, but it seems that businesses are still holding off investment plans for now. Hopefully that will change in the next few months, given the recovery in the survey.” said Mr Oster.

For more information, please see the NAB Monthly Business Survey December 2020