Below trend growth to continue
Confidence rebounds on the back of roadmaps, vaccination.
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Business confidence rebounded strongly in September to be well above its long-run average, after falling well into negative territory in prior months. The improvement was driven by large shifts in confidence in NSW and Victoria following the announcement of reopening roadmaps in these states as well as rising vaccination rates across the country. Recreation & personal services, wholesale trade, and retail – some of the sectors worst affected by lockdowns – all saw a significant confidence boost, as did construction. Still, confidence generally reflects hope rather than reality and the prospect of full reopening remains in the future. Current business conditions deteriorated significantly across all states, particularly NSW and Victoria, as lockdowns and disruptions continued to weigh on activity (though in level terms conditions remained reasonable). In addition, capacity utilisation sank further, to 78.4 percent, and forward orders softened and turned negative. Overall, the economy has shown considerable resilience through the most recent round of lockdowns – supported by policy and adaptations learned through past lockdown experiences – but this resilience may be wearing thin. Firms are now focused on the promise of a rebound in activity when vaccination targets are met and restrictions are lifted in October and November. A strong rebound remains likely, although questions remain around consumer behaviour and policy settings as the country shifts to ‘living with COVID’.
Business confidence rebounded 19pts to +13 index points in September, with NSW (up 42pts to +27 index points) and Victoria (up 16pts to +5) driving the shift, while other states fell back somewhat. There were big improvements in confidence in wholesale (up 28pts), recreation & personal services (up 26pts), and construction (up 23pts).
“Interpreting this month’s results really depends if you are an optimist or a pessimist,” said Mr Oster. “Businesses are really looking forward to reopening, and confidence increased markedly on the back of NSW and Victoria’s reopening roadmaps. The rise in confidence suggests they see the roadmaps that have been announced as sufficient to allow activity to really rebound in the coming months.”
“Still, confidence is more about hope for the future than what is happening in the present,” said Mr Oster. “On that front, conditions really deteriorated which shows that lockdowns are taking a toll, despite the resilience the economy has shown through this period.”
Business conditions fell 9pts to +5 index points in September, continuing a rapid decline from record highs pre-lockdown. The decline in conditions was shared across trading (down 10pts), profitability (down 13pts) and employment (down 8pts) and all states saw a decline, with large falls in NSW (down 16pts), SA (down 13pts), Victoria (down 11pts), and Tasmania (down 9pts). Conditions in the recreation & personal services sector fell 26pts.
“NSW and Victoria were into their third month of lockdown in September and that shows in the way business conditions have deteriorated,” said Mr Oster. “There were large falls in NSW and Victoria but conditions were down across the board. From an industry perspective, recreation & personal services continue to be hit hard by health restrictions.”
Capacity utilisation also fell significantly, from 80.1% in August to 78.4% in September. Capacity utilisation is now almost 7 percentage points below its pre-lockdown peak of 85.2% (reached in April 2021). Forward orders also fell 7pts to turn negative at -1 index points.
“There was a large hit to capacity utilisation in September which is now well down from its pre-lockdown peak,” said Mr Oster. “That is a further sign of the significant slack in the economy as everyone waits for lockdowns to come to an end.”
“The good news is, if we look back at past lockdowns, confidence has tended to rebound in advance of reopening, with an improvement in conditions following,” said Mr Oster. “Our expectation would be for that pattern to repeat this time. With NSW achieving its 70% vaccination target and further thresholds expected to be achieved in coming weeks, the economy is well placed to recover in October and November as activity is allowed to restart.”
For more information, please see the NAB Monthly Business Survey (September 2021)
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