Key Points:

• Last months spike in business conditions was again short-lived, pulling back towards long run average levels in November. Despite the drop, the overall trend is still looking much better than 12-18 months prior, while levels of capacity utilisation have continued to improve. Orders held up reasonably well, which reflects well on near-term demand. The fall in conditions was driven by all three components (sales, profits and employment), although the last remains the weakest, pointing to only very modest growth in employment – insufficient to prevent a further rise in the unemployment rate. But while last months spike was relatively broad based, the pull back in November was much more mixed across industries – concentrated in retail, manufacturing and service industries. We are yet to see any clear beneficiaries of the AUD depreciation.

• Firms uncertainty over the outlook for their industries was reflected in a further erosion of business confidence. Confidence levels vary greatly across industries, although the spread narrowed considerably in the month. Services have been replaced with construction as the most optimistic. Other leading indicators are mixed. Forward orders maintained last months rise, but the ‘bellwether’wholesale industry remains weak.

• Softer commodities and labour market outlook mean we have changed our rate call to two cuts of 25 bp in March and August 2015, then on hold until late 2016. GDP forecasts cut reflecting weaker history and terms of trade: 2014/15 2.5% (was 2.9%); 2015/16 3.0% (was 3.2%). Unemployment rate now to peak at around 6¾% (was 6½%).

Implications for Forecasts

• Recent monthly economic indicators and business surveys show continued moderate global economic growth along with big variations between economies. Low interest rates, falling oil prices and smaller budget cutbacks in big advanced economies underpin faster growth of 3½% in 2015 and 2016. Global economic growth should remain heavily reliant on an upturn in India accompanied by continued good performance in China and the US. Headwinds to global growth should come from weakness across Japan, the Euro-zone and Latin America.

• Softer commodities outlook and prospect of more severe deterioration in labour market mean we have changed our rate call to two cuts of 25 bp in March and August 2015, then on hold until late 2016. GDP forecasts cut reflecting weaker history and terms of trade: 2014/152.5% (was 2.9%); 2015/16 3.0% (was 3.2%). Unemployment rate now to peak at around 6¾% (was 6½%).

• 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 November to our model for Q4 (+2) suggests that predicted demand growth will be similar to Q3. Similarly, business conditions over predicted GDP growth in Q3. Based on trend business conditions for November, our model implies even softer predicted GDP growth in Q4. Applying business conditions derived from our‘ wholesale leading indicator’(below) implies much weaker GDP growth over coming quarters.
• Wholesalers continue to lag well behind the rest of the economy, suggesting the industry continues to face significant challenges –AUD depreciation would raise costs facing wholesale importers. Wholesale conditions improved modestly, but remain well into negative territory (-11), which makes 26 out of 27 months where wholesale conditions have been negative. 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 has narrowed since last month. This indicator predicts much softer business conditions in Q4 than current levels.

For further analysis download the full report.

• Monthly Business Survey – November 2014 (PDF, 551KB)

Also available:

• Global & Australian Forecasts – December 2014(PDF, 571 KB)