Key Points:

• Business confidence lost ground in September –lowest level since pre election – in the face of a persistently soft operating environment for many firms. Forward orders remained soft, prompting de-stocking and competitive pricing which appears to have weighed on profitability. Confidence varies significantly across industries, with services firms the most optimistic.
• Business conditions fell again in September bringing the index back to its lowest level in 4 months and confirms our expectation that the (narrowly based) jump in July would be short lived. Most industries recorded a drop in September, although transport & utilities were surprisingly strong (falling oil prices and removal of carbon tax?). Forward orders eased again, implying Q3 domestic demand will remain soft. Capacity utilisation also fell noticeably.
• A drop in profits and employment drove conditions lower, with the latter moving significantly into negative territory – in contrast to some other labour market partials. Forward indicators are soft, but trend conditions in the ‘bellwether’ wholesale industry are a little less weak. Our wholesale leading indicator implies soft underlying conditions and below trend growth in Q3.
• GDP forecasts revised down modestly: 2014/15 2.8% (was 2.9%) and 2015/16 3.2% (was 3.4%). Unemployment rate still to peak at around 6½%. No change likely in cash rate until near the end of 2015.

Implications for Forecasts

• Disappointing global growth continued into mid-2014 with GDP expanding by a sub-trend 3% yoy and concern over weakness in Japan and the Euro-zone offsetting solid growth in the US and UK. Chinese forecasts unchanged. We expect global growth to improve to around 3½% yoy through 2015 and 2016, mainly reflecting faster growth in the US and India as well as a return to more normal growth in Latin America. Inflationary pressures should remain subdued, allowing central banks in the US and UK to lift rates very gradually through the next few years while rates should stay low in Japan and the Euro-zone.
• Weaker Q3 and terms of trade means GDP forecasts revised down modestly: 2014/15 2.8% (was 2.9%) and 2015/16 3.2% (was 3.4%). Unemployment rate still to peak at around 6½%. We continue to expect no change in cash rate until a tightening cycle begins near the end of 2015.

For further analysis download the full report.

• Monthly Business Survey – September 2014 (PDF, 240KB)

Also available:

• Global & Australian Forecasts – October 2014(532PDF)