Key Points:

• Business sentiment has shown great resilience to external shocks in the July NAB Monthly Business Survey, with firms choosing to remain focussed on the positive trends within their own business. Despite the cacophony of events – including Brexit and the recent Federal election – that have posed a risk to market sentiment in the past month or so, firms are continuing to report positive levels of business confidence (albeit a little below average levels). The business confidence index eased slightly to +4 index points in July (from +5), which is modestly below the average of +6. The resilience of business confidence appears to stem largely from the fact that firms are still experiencing very elevated levels of business conditions – noting that the Survey was also conducted prior to the RBA recent decision to cut the cash rate 25bps.

• Business conditions dropped back as well in July, to +8 index points (from +11), but this is still quite an elevated level that sits well above the long run average of +5. The contribution from major industries suggest a relatively mixed bag, with service sectors continuing to be the best performers. Signs of a broadening recovery in recent months have again become more obscure following sharp deteriorations in transport and wholesale – although a recovery in retail conditions was encouraging. While trading conditions and profitability have been the main driver of elevated business conditions, both of these contributed to the deterioration during the month. Encouragingly, the employment component managed to hold onto the gains seen in June, suggesting ongoing employment growth. Inflation measures in the Survey generally stayed soft, although there was a surprise spike in retail prices.

• For a while now, the NAB Business Survey has provided a relatively consistent message on the health of the Australian economy. It continues to show a steady recovery in non-mining activity, with the services sectors clearly leading the way. But while the Survey points to a reasonably upbeat outlook for the near to medium-term, longer term risks are becoming increasingly apparent, particularly going into 2018 as resource exports start to level off and dwelling construction turns negative. These headwinds may require additional policy action to support growth, especially if the RBA hopes to see inflation return to within its target band. Both global and domestic disinflationary pressures are expected to keep CPI inflation below the target band for an extended period, while structural shifts in the economy and modest economic growth will leave the unemployment rate under pressure. To stabilise the unemployment rate (at around 5 ½%) we expect the RBA will feel the need to provide further medium term support through two more 25bp cuts in May and August 2017 (to a new low of 1%). And thereafter raises the prospect of the RBA considering the use of non conventional monetary policy measures.

For full analysis, download report:

• NAB Monthly Business Survey:  July 2016 (PDF, 175kb)
• NAB Monthly Business Survey Media Release: July 2016 (PDF, 804kb)

Also available:

• Global and Australian Forecasts – Aug 2016 (PDF, 682kb)