NAB Monthly Business Survey – August 2015

Business conditions point to a further improvement in the non-mining economy, even as jitters in financial markets weigh on confidence. The conditions index jumped 5 points to +11 in August lifting the trend index to its highest level since late 2009.

By NAB Group Economics

Key Points

Business conditions point to a further improvement in the non-mining economy, even as jitters in financial markets weigh on confidence. The conditions index jumped 5 points to +11 in August, after losing a little ground last month, lifting the trend index to its highest level since late 2009. By component, both trading conditions and profitability recorded a notable improvement, but the employment index remains at very subdued levels. This outcome adds to the mounting evidence that AUD depreciation and record low interest rates are having the desired effect and helping to offset the weakness in mining. Even so, outcomes vary significantly by industry. Services sectors continue to outperform, while retail has improved considerably. The ‘bellwether’ wholesale industry remains weak, but probably reflects margin squeeze due to AUD depreciation as other leading indicators (aggregate forward orders and capacity utilisation) have improved.

Confidence pared back further in August (from +4 to +1), unwinding the post budget gains and hitting its lowest level since mid-2013. While confidence tends to track conditions quite closely, recent financial market ructions and China growth concerns appear to have had an unnerving effect on business – albeit not enough to send confidence into negative territory (a good outcome given the degree of market volatility). Confidence eased in most industries, although mining and construction recovered some of last month’s sharp declines.

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

Global growth remains sluggish and below trend and we have slightly lowered our forecasts to take account of weaker than expected outcomes in India, Canada and Brazil. The pace of growth in the big advanced economies has picked up, mainly reflecting a US recovery from weak first quarter growth. In contrast, Japan and the Euro-zone are not growing strongly and Canada is in recession. Emerging market economies drive most global growth and they are slowing – with falling world trade volumes and softer commodity prices eroding incomes, spending and output across much of East Asia, Latin America and S Africa. The bursting of the Chinese share market bubble and the authorities’ confusing response adds further unwelcome volatility and uncertainty to an already uninspiring outlook and we expect growth to remain soft and below trend through the next two years with no sign of any imminent upturn in activity and sizeable downside risks. Continued downward pressure on commodity markets is to be expected, given this outlook.

Q2 GDP showed the Australian economy growing at just 2% y/y as it struggles to transition to non-mining sources of growth amidst lower national income. Against that, there is increasing evidence that growth momentum is broadening across the non-mining economy – not limited to the dwelling sector – in response to the lower AUD and interest rates. Improvement is particularly evident in services sectors in both the NAB survey and the official national accounts. Due to the lower base, our 2015/16 GDP forecast is now 2.4% while the 2016/17 forecast is unchanged at 3.1%. The unemployment rate eases to 6% through 2015/16 and to 5¾ in 2016/17.

While risks to the outlook stemming from financial market volatility and a slower China are front of mind, at this stage they are balanced by stronger local momentum in the non mining sector. There is little case on purely domestic grounds for easier monetary policy, with areas of economic weakness unlikely to respond to lower rates, although external risks suggest the RBA will retain an easing bias for some time.

For further details, please see the attached documents.