December 8, 2015

Monthly Business Survey – November 2015

Consistently above average business conditions are an encouraging sign that the apparent non-mining sector recovery continues to gain traction, despite relatively muted levels of business confidence.

Consistently above average business conditions are an encouraging sign that the apparent non-mining sector recovery continues to gain traction, despite relatively muted levels of business confidence. Although better business conditions have not been felt uniformly across the economy, underperforming industries (outside of mining) have gradually been gaining ground in recent months – providing further evidence of a more entrenched non-mining recovery.

Business conditions remain buoyed by the non-mining recovery

The latest NAB Monthly Business Survey suggests the apparent recovery in the non-mining economy has remained on track, with business conditions holding up at above average levels for the past nine months.

The NAB Business Conditions Index remained at +10 points in the month of November – the fourth consecutive month of conditions at this level – which is well above its long-term average (+5 points).

According to NAB Group Chief Economist Alan Oster: “This is basically another strong result for the NAB Survey, which in conjunction with signs of improvement in the labour market, means we can put more faith in the building non-mining sector recovery”.

Interest rate and AUD sensitive industries have generally outperformed, while improvements in areas such as retail in November are an encouraging sign that the recovery is becoming more entrenched. In contrast, mining continues to weaken. This is also reflected in variations across states.

“In fact, the survey is showing a widening gap between deteriorating mining/mining services (-21) and the rest of the economy” said Mr Oster.

However, business confidence has been disappointingly muted, despite recouping some of the losses from last month. The confidence index rose from +3 to +5, which is still marginally below its long-run average.

According to Mr Oster, “Given improved prospects for the domestic economy outside of mining, relatively subdued confidence is most likely a reflection of the uncertain global economic environment. In any case, it was good to see a broad-based increase in confidence across industries”.

NAB’s measure of capacity utilisation eased back in November (to 80.9% from 81.2%), despite better trading conditions. The decline in capacity utilisation was particularly heavy in the mining industry, but mixed elsewhere.

“Capacity utilisation is a useful measure of the underlying health of the economy. It eased a little this month, but the trend remains distinctly positive, which bodes well for business investment and the labour market” said Mr Oster.

NAB continues to see no change to the RBA cash rate in coming months. The RBA’s recent policy statement continues to reference a “gradual improvement in conditions in non-mining sectors” and further easing would require a significant deterioration in the economic outlook or a reassessment of growth in the non-mining economy. Today’s survey suggests maintaining the status quo.

Implications for NAB forecasts (See latest Global and Australian Forecasts report also released today):

Although some of the risks hanging over global markets have abated, recent global economic growth and the outlook remains lacklustre.  Global growth remains stuck around the 3¼% seen since mid-2012 as lower commodity prices, capital flow reversals and central banks focused on getting inflation back toward target take a toll on the pace of expansion in the big emerging market economies that have underpinned most global growth.

In Australia, Q3 GDP figures were consistent with our view that the recovery across the non-mining recovery is broadening, and recent business survey results suggest this momentum continued into Q4. Despite this, downgraded commodity price forecasts have prompted a lowering of our real GDP growth forecasts, and another 11½% drop in the terms of trade in 2016 will weigh further on national income. Real GDP is now forecast to pick up more gradually to 2.7% in 2016 and 3.0% in 2017 (previously 2.9% and 3.2% respectively). Our unemployment rate forecasts are only a fraction higher however – as the composition of growth tilts towards more labour-intensive sectors – easing gradually to 5.8% by end-16 and 5.7% by end-17.

For further analysis download the full report.

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