Below trend growth to continue
Further gains as the economy continues to open up
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Business conditions and confidence rose in November, continuing to suggest a rapid rebound in the economy as restrictions are eased and state borders open up. While renewed optimism in Victoria drove the improvement in confidence, Victoria was one of only two states to report a deterioration in conditions, although we expect conditions to improve as the impact of its recent severe lockdown wears off. Overall both confidence and conditions are now above average, and stronger than the period right before the pandemic – albeit this partly reflects some “snapback” following the containment of the virus. Encouragingly, other lead indicators improved in the month: capacity utilisation saw a large gain and forward orders turned positive, the latter suggesting that the pipeline of work has begun to build. That said, there is some way to go before a full recovery is reached. Capacity utilisation remains around 1.4ppt below its long-run average, while the capex and employment indexes remain in negative territory. Even with the significant improvement in trading conditions and profitability, businesses will likely to need to see a sustained improvement in forward orders and a complete recovery in capacity utilisation before renewed hiring and investment plans are put in place.
Business confidence rose 9pts to +12 index points in November, while business conditions rose 7pts to +9 index points. By sub-component, trading and profitability drove the gains in conditions, both up 10pts in the month. The employment index continues to lag the improvement in the activity measures, recording an unchanged -5 index points in the month.
According to Alan Oster, NAB Group Chief Economist “in aggregate the business survey saw another large gain in November. Encouragingly, business confidence saw another large rise, driven by an improvement in Victoria. Conditions also saw gains and, importantly, this was evident across most states”.
“However, the employment index did not see a further improvement and remains in negative territory. So, while activity is picking up as the economy reopens, businesses are yet to move back into hiring mode. This is not completely surprising with the labour market often lagging developments in activity – so we will keep closely watching this measure.” said Mr Oster.
Capacity utilisation continue to recovery alongside the number of businesses seeing an improvement in confidence and conditions. In aggregate capacity utilisation rose by 1.4ppt to 79.3%.
“Capacity utilisation continued to recover with another solid gain. However, it also suggests that despite a large rebound over the last 6 months, we are not yet fully recovered.” said Mr Oster.
“What is promising, is that the measure suggests that there will be another large rise in activity in the December quarter – a nice follow up to the solid rebound we saw in the Q3 national accounts last week” said Mr Oster.
Other indicators such as forward orders and cash flow saw solid gains in the month, rising by 9 pts to +6 index and up 3 pts to +23index points, respectively. However, reported capex dipped and remains negative.
“We continue to closely watch forward orders as these are an indication as to whether the gains in conditions will be sustained. For now, signs are positive and hopefully in time this sees a return to an expansionary trend in both employment and capex” said Mr Oster.
“Businesses appetite to hire worker and undertake new investments will be crucial to the economy’s recovery going forward, as the initial bounce in activity – and any pent-up demand – fades” said Mr Oster.
For more information, please see the NAB Monthly Business Survey November 2020
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