Key points:

• The NAB Monthly Business Survey is now suggesting some moderation in the non-mining economic recovery, with the aggregate level of business conditions (a combination of trading, profitability and employment conditions) dropping in October – the trend has also steadily eased from its most recent peak in May. Despite the subdued trend, business conditions remain at above average levels and business confidence has been tracking broadly sideways for some time – albeit easing in the month as well. In October, the business conditions index fell 2 points, to +6 index points, which is slightly above the long run average of +5. There was a narrowing in business conditions across industries in the month, although this was partially the result of a deterioration in conditions for the best performing (services based) industries. However, a noticeable improvement in retail conditions was encouraging, although the trend remains quite soft. By component, both trading and employment conditions deteriorated – although the former remains elevated – while profitability was steady. Inflation measures in the Survey have been subdued and generally moderated further in the month.

• Business confidence has proven to be relatively resilient this year, but did moderate in October – falling 2 points to +4 index points (below the long-run average of +6). While we would like to see confidence at higher levels as a precursor to stronger non-mining business investment, this could still be interpreted as a solid outcome, particularly given the global political uncertainty ahead of upcoming elections. However, other leading indicators were not encouraging either, with forward orders falling significantly, while capacity utilisation – of relevance to future employment and capital spending – eased further.

• The recent moderation in some NAB Business Survey indicators is a concerning trend that warrants close monitoring, but our assessment is that the deterioration to date is not (yet) enough to warrant a significant change in the outlook. However, if the recent trends were to continue, it would be unsettling and imply that the non-mining recovery has started to run out of steam earlier than expected. Subdued retail conditions are an additional concern. For now though, we would only be looking to slightly lower 2017 forecasts and remain reasonably comfortable with the near-term outlook – which is expected to be supported by commodity exports and the housing construction cycle. That said we are clearly more concerned than the RBA about the near term outlook. Beyond the near-term, impetus from those growth drivers will fade which will see the economy slow into 2018. Two more 25bp rate cuts are still expected from the RBA next year in response to ongoing low inflation and a more subdued growth outlook. NAB’s latest Australian economic forecasts will be available on Thursday.

For full analysis, download report:

• NAB Monthly Business Survey: October 2016 (PDF 463kB)
• NAB Monthly Business Survey Media Release: October 2016 (PDF 241kB)