Key Points:

• Business conditions were unchanged at an above average +9 index points in October, again consistent with the theme of recovery in non-mining sectors of the economy. By component, employment conditions maintained the improvement recorded last month, while trading conditions improved modestly and profitability eased – although both of these remain at very elevated levels. Service sectors continue to report more favourable conditions than other industries, despite a pull-back in personal services during the month, while mining, manufacturing and wholesale were all negative. Capacity utilisation increased further this month, which bodes well for business investment and the labour market. But despite solid conditions, forward orders have weakened (turning negative in the month), raising the risk of a softening in activity in the very near term.

• Business confidence remains somewhat fickle, despite persistent strength in business conditions. The confidence index eased back in the month, unwinding much of the gain following the Government’s leadership resolution and a paring-back of concerns about emerging markets. Nevertheless, confidence remained positive (at +2) – albeit still well below the long run average – and was unchanged in trend terms (+3). The deterioration was reasonably broad based, with only finance/ property/ business, manufacturing and mining improving (although mining remains negative).

• The business survey still points to a reasonably resilient recovery in the non-mining sector, despite stubbornly sluggish business confidence in the past six months. Better business conditions are not being felt uniformly across the economy, as industries that are better positioned to benefit from lower interest rates (especially those closely tied to residential real estate) and the AUD remain the clear outperformers – personal and business services are the main standouts. Despite a number of downside risks (mostly stemming from offshore), should non-mining sectors continue to improve, we maintain the view that further RBA cuts are unlikely. Monetary policy is expected to remain on hold for an extended period, although the timing of the first hike has been pushed out till mid-2017.

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

• Although some of the risks hanging over global markets have abated, recent and forecast global economic growth remains lacklustre. Growth remains stuck in the 3 to 3¼% range seen since mid-2012 as lower commodity prices, capital flow reversals and central banks focused on getting inflation back toward target take a toll on the pace of expansion in emerging market economies that underpin most global output expansion. Growth should level out in the US and UK at a moderate 2 to 2½% pace and pick up slightly in the poorly performing Euro-zone and Japanese economies but this is not enough to fundamentally change a global outlook that remains dominated by the loss of momentum in the emerging economies. Inflation is low in the big advanced economies, allowing central banks to take a cautious and gradual approach to lifting interest rates to “normal” levels – but inflation is still a problem in some emerging economies.

• In Australia, we remain cautiously optimistic that the gradual recovery in the non-mining sector is gaining traction. Recent outcomes from the business survey support this contention with business conditions holding up at a high level in October, and the unemployment rate holding steady. In addition, partial indicators for Q3 GDP suggest a high outcome, which would retrace the temporary weakness in Q2. The RBA appears to concur with this assessment, and chose to hold off further monetary policy easing in the month despite some tightening of financial conditions. Low inflation however does provide room for the RBA to ease, although this would require evidence that local demand conditions are deteriorating again (not our or the RBA’s central case scenario), and more concrete evidence that housing demand is easing. As such the RBA is expected to remain on hold for an extended period, although we have pushed out the timing of the first hike until mid-17. Real GDP is forecast to expand by 2.6% in 2015/16 and 3.0% in 2016/17, with El Niño only subtracting marginally. The unemployment rate eases gradually but remains elevated for an extended period.

For further details, please see the attached documents.

• Monthly Business Survey –  October 2015 (PDF, 387KB)

Also available:

• Global & Australian Forecasts – November (PDF, 1MB)