Key Points:

• The fundamental story painted by the January Business Survey is still one of a soft economy, with little momentum, weakish confidence and considerable difference across sectors. At the margin the Survey was a touch softer than December. Business conditions were a little lower (on an un-rounded basis) from a downwardly revised December result. In January, sales deteriorated considerably, profits eased and employment remained soft. Thus business conditions are increasingly below long-run average. By industry, manufacturing deteriorated considerably, while most other industries were flat-to-lower – mining and wholesale were exceptions. Against that orders were up (albeit still soft), while non mining capex is still reasonable. However, a sharp –broad based – drop in capacity utilisation is a concern, as is weakness in the ‘bellwether’ wholesale industry.
• Business confidence edged up a little, but are still below long run averages. Confidence remains very weak in mining, consistentwith lower commodity prices, but multi-year lows for the AUD likely contributed to a considerable improvement from last month. Changes in confidence were mixed across other industries. Retail reported a surprising improvement, while confidence in transport/utilities dropped back despite low oil prices.
• The economic forecasts are largely unchanged (see p4). The RBA cut the cash rate (25bps) one month sooner than we expected, in an attempt to boost a soft economy with rising unemployment. Our view is that the RBA will sit back and watch for a few months to see if more needs to be done. Fundamentally we still see the need for another cut to counter lower commodity prices and other domestic headwinds. We have brought forward our August cut to May – with a 30% probability of another cut thereafter. The timing and extent of the cuts will be heavily data dependent while a resurgent housing market would give the RBA reason to rethink its rate cutting inclinations.

Implications for forecasts:

• We have not changed our global or domestic economic outlook from that published in the most recent Global and Australian Forecasts report.
• Globally moderate sub-trend global growth continues with a diversity of economic conditions (solid expansion in US, UK, India and China, weakness in Euro-zone, Japan, Latin America). Falling oil prices should boost global activity, although the impact varies between oil exporting and importing countries. Our estimates are conservative but lower oil prices still boost our forecasts for the US, Japan, Euro-zone, India, China and non-Japan Asia while Russia and other big energy suppliers are revised down. Adding in the other (mainly negative) recent changes in the environment gives growth going from 3% last year to 3½% in 2015 and 2016.
• Locally fully factoring in lower oil and other commodity forecasts have created a larger “v” in the shape of our activity forecasts – softer in the near term (2014/15) as iron ore/coal effects dominate but stronger in the medium term (2015/16) reflecting oil prices, rate cuts and marginally stronger MTP growth and exports. At the margin we are similar to the RBA’s MPS forecasts but slightly more optimistic in the medium term. Unemployment continues to deteriorate but peak lower (6.6%) and later(Q4 2015).
• The RBA cut the cash rate (25bps) one month sooner than we expected, in an attempt to boost a soft economy with rising unemployment. Our view is that the RBA will sit back and watch for a few months to see if more needs to be done. Fundamentally we still see the need for another cut to counter lower commodity prices and other domestic headwinds. We have brought forward our August cut to May – with a 30% probability of another cut thereafter. The timing and extent of the cuts will be heavily data dependent while a resurgent housing market would work in the opposite direction.
• 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 forward orders from the December quarter to our model suggests that predicted demand growth will be similar to Q3. Similarly, business conditions over predicted GDP growth in Q3. Based on Q4 business conditions and the January trend (+3), our model implies even softer predicted GDP growth in Q4 and Q1. Applying business conditions derived from our ‘wholesale leading indicator’ (below) implies much weaker GDP growth over coming quarters.

For further analysis download the full report.

• Monthly Business Survey – January 2015 (PDF, 191KB)