Growth, inflation and labour market all easing
Business survey suggests solid near-term activity, despite easing from multi-year high.
The February NAB Monthly Business Survey gave back the surprisingly strong gains seen in the previous month although both conditions and confidence remain at above average levels. Some payback was flagged in last month’s Survey, as temporary factors were thought to have been behind much of the spike in both business conditions and confidence. However, despite the pull-back, both of these indicators remain at levels consistent with solid business activity in the near-term, and are higher than through much of H2 2016. There are still some points of concern such as the persistent weakness evident in retail conditions, which warrant close monitoring. Additionally, it is the longer-term growth picture that is more concerning, particularly as the contribution from LNG exports, temporarily higher commodity prices and the residential construction boom fade, putting pressure on the labour market. However, the RBA is increasingly putting emphasis on financial stability concerns, which is likely to impact the response of monetary policy. NAB Economics will release updated financial and economic forecasts tomorrow.
The previous month’s unexpected surge in Business conditions was more than fully unwound in February, although the index remains at levels that point to solid rates of business activity at present. The business conditions index dropped 7 points, to +9 index points in seasonally-adjusted terms, which is still above the long-run average (+5). Business confidence also gave back some ground, but has not quite returned to its December level (falling 3, t0 +7 index points).
According to Mr Alan Oster, NAB’s Chief Economist, “we were not surprised to see business conditions drop back from their multi-year highs, having flagged in last month’s Survey that we suspected a number of temporary factors probably underpinned the unbelievably strong result. Even so, conditions are still holding up at levels that would make you reasonably comfortable about the near-term growth prospects for the economy, putting aside some of the concerning trends we are seeing in retail”.
Most industries are showing solid, or improving, business conditions, although the decline in business conditions this month was largely driven by a big deterioration in recreation & personal services and smaller falls in transport and finance/ property/ business services. “We saw the big service industries drive the moderation in business conditions this month, but even after pulling-back a little, these industries continue to lead the non-mining recovery”, said Mr Oster. He added that, “it is encouraging to see so many industries reporting solid levels of business conditions, but it is hard to look past the disappointing results from retail, especially given the importance of consumption to the growth outlook. On a brighter note though, the industry seems to have lifted its demand for labour since last year”.
Within business conditions, a decline in trading conditions drove much of the fall in conditions, although profitability eased as well – both remain quite positive overall however. Employment conditions also eased slightly, but the trend remains quite positive. According to Mr Oster, “the trend in employment conditions has improved notably in the past two months, to a point where the index now suggests the economy should be producing enough jobs to bring down the unemployment rate should the participation rate remain steady.” However, the NAB employment index has been suggesting faster employment growth than the ABS Labour Force Survey in recent months.
Leading indicators suggest a modestly positive near-term outlook. Forward orders were steady at above the long-run average, while the capacity utilisation rate stayed at solid levels (albeit below its recent peak). According to Mr Oster, “forward orders are pointing to modestly positive near term prospects for activity, although may not be enough to sustain the current levels of business conditions. Nonetheless, diminished spare capacity is an encouraging sign for business investment and the labour market”.
“Business conditions are still at quite lofty levels, consistent with our expectation for the economy to enjoy solid rates of growth in the near-term. However, it is the longer-term growth picture that we are more concerned about, particularly as the contributions from LNG exports, temporarily higher commodity prices and the residential construction boom fade, putting pressure on the labour market. However, the RBA has made it clear that they are putting increased emphasis on financial stability concerns, which is likely to impact the response of monetary policy”, said Mr Oster. NAB Economics will release updated financial and economic forecasts tomorrow.
NAB’s new Multinational Business Survey will also be released today. NAB Economics have partnered with NSW Trade and Investment in utilising the NAB Quarterly Business Survey (QBS) to gain a better understanding of foreign multinationals operating in Australia, and especially NSW. Commencing from the December quarter 2016, the NAB QBS asked firms an additional question on the location of their parent company (if they have one; see report for definition). That has allowed us to single out the performance of foreign multinationals operating within Australian borders, based on the numerous metrics available from the Survey. Attempts are currently underway to extrapolate a time series of business indicators for these firms, but for now available outcomes are restricted to Q4 2016.
For full analysis, download report:
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.