April 9, 2013
Monthly Business Survey – March 2013
Business conditions fall to weakest level in almost four years but confidence steady. Previous surge in activity in consumer sectors retail & manufacturing unwinds, with signs lower interest rates need more time to fully work through economy.
Business conditions fall to weakest level in almost four years but confidence steady. Previous surge in activity in consumer sectors – retail & manufacturing – unwinds, with signs lower interest rates need more time to fully work through economy. Businesses seemingly unfazed by events in Cyprus or political leadership scuffles at home – at least no more than usual. Forward indicators still poor, not boding well for near-term demand.
- The business environment remained challenging in March, with business conditions deteriorating to the lowest level since May 2009. The slump in activity reflects a weakening in trading and employment conditions, while profitability was unchanged at a subdued level. While forward orders improved, they remained weak, with the outlook for near-term demand not helped by still low levels of capacity utilisation and capital expenditure. Heavy falls in manufacturing and retail business conditions indicate we are yet to see the upswing in consumer demand that policy makers are searching for; instead, it seems that either lower interest rates need more time, or more stimulus (eg. RBA rate cuts) may be needed to set the economy back on a steady growth path.
- Business confidence was resilient in March, lifting marginally despite reignited worries about a European crisis and political uncertainty at home. It is possible that relatively higher equity prices and lower borrowing rates are keeping firms somewhat optimistic. However, the mood has deteriorated sharply in mining, with confidence falling to its weakest level in four years. This was offset by better confidence in interest sensitive sectors.
- Overall, the survey implies underlying demand growth (6-monthly annualised) of around 2¼% in the March quarter. Our wholesale leading indicator suggests little near-term improvement in already weak activity levels.
- Labour costs growth was unchanged at a below-average rate, held down by subdued employment conditions. Overall wage cost pressures appear well contained at present. Price deflation was apparent in March, with the poor outcome consistent with the weakness in trading conditions. Combined with modest costs growth, the survey implies further pressure on margins, especially in retail.
Implications for NAB forecasts (See latest Global and Australian Forecasts report also released today):
- Global forecasts little changed. The latest bout of Euro-zone instability has taken a toll on global equity markets and we remain to see the impact of the changes in Japanese monetary policy. While business surveys in the advanced economies show a lift in sentiment, the reality is Europe is likely to be in recession until late 2013. USA is reasonable and only China is showing signs of accelerated growth. Overall we still expect growth to pick up in the latter half of this year, before strengthening to an above-trend 3.9% in 2014 as recessions end in Europe,Japan reflates and the big emerging market economies pick up speed.
- GDP forecasts broadly unchanged – we have lifted Q1 consumption (strong retail data) and softened outlook for investment (lower commodity prices). We see GDP of 2.4% in 2013 (was 2.3%), lifting to 3.0% in 2014 (was 3.1%). While there are signs the Australian economy is strengthening, falling commodity prices and high AUD still weighing on activity. We see unemployment rising to around 5¾% by late 2013. With inflationary pressures well contained, there is thus scope for two more rate cuts by year-end (possibly June & November). Timing is still fluid with higher house prices a possible delay factor but the unemployment path will be the key variable.
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