Monthly Business Survey – July 2011

Business conditions weaken showing an economy continuing to lose momentum and traveling below trend. Confidence remains subdued in the face […]


Business conditions weaken showing an economy continuing to lose momentum and traveling below trend. Confidence remains subdued in the face of continuing uncertainty – but carbon didn’t appear to cause further retreat.

  •  Growth in the domestic economy weakening in July, with business conditions now indicative of below-trend growth. This weakening trend was broad based – with the falls most pronounced in finance and business services (reflecting recent global uncertainty and volatility associated with US and European debt issues), manufacturing and the service sectors. The exception was retailing where sales strengthened on the back of renewed aggressive discounting, post the very weak sales reported last month. Mining also improved slightly. The labour market reading, however, moved noticeably into negative territory for the first time since mid 2009.
  •  Overall business confidence remained at subdued levels – with the US debt situation coupled with the negative impact of the high Australian dollar and continued cautiousness of households eroding confidence in a number of service sectors and manufacturing. Construction confidence, on the other hand, improved and mining sentiment was broadly stable. As the first reading of business confidence post the carbon tax announcement it appears that, to date, the latter has had little impact on confidence.
  •  New orders remained at depressed levels in July – with further sharp falls in manufacturing, retail and wholesale, and to a lesser extent, mining orders. Capacity utilisation fell a surprisingly large amount in July and is now below average levels. If conditions in July persist, the survey would be consistent with 6-monthly annualised growth in domestic demand of around 23⁄4%, and GDP (ex coal) of 21⁄2% in Q3 2011.
  •  Labour costs growth picked up in the month, which is likely to in part reflect the increase in the national minimum wage. Final products prices also rose, but retail prices fell sharply.

Implications for NAB forecasts:

  •  The synchronised slowdown in global growth has worsened and we have revised our growth forecasts down by 1⁄4pt in 2011 (to 4%) and 1⁄2pt in 2012 (to 3.8%). There are big disparities between regions in terms of their economic outlook. The emerging market economies are slowing but their growth is still quite rapid and it is this that provides much of the ballast for global growth through the next few years. Growth in the developed world is likely to be lacklustre at best (around 2%). This means rates stay lower for longer and unemployment rises.
  •  Australian forecasts have been revised down a touch (especially in the near term) given heightened global uncertainty and signs that local momentum continues to slow, together with continued delays in the recovery of Australia’s coal exports. Near-term softness also has base impacts on 2012 forecasts. But Australia’s high terms of trade, resumption of full coal production (by late 2011), strong mining investment and Queensland rebuilding are expected to boost GDP growth. NAB forecasts are significantly weaker than RBA’s view – we see year- ended growth of 2.6% this year (RBA 31⁄4%) and around 31⁄4-3% in the out years (RBA 33⁄4%). Calendar year forecasts were revised down 1⁄4% (to 1.5% in 2011 and 4.2% in 2012 respectively).
  •  Core inflation (ex carbon pricing) still to move up to around (or above) 3%. The next move in the cash rate is still up (25bp around year end) – but only when growth momentum and labour market tightness are more apparent (with final 25bp increase in mid 2012).

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