April 28, 2016

NAB SME Business Survey – March 2016

Business conditions unchanged at +3, slightly below the long-run average. Business confidence eased to the neutral mark in the March quarter.

The NAB SME business survey shows that conditions for small businesses remained stable but subdued into the first quarter of 2016. Business conditions continue to vary across industries and states, with services sectors and the largest eastern states outperforming, although a number of previously strong industry performers lost some momentum in the quarter. Conditions also vary across firm size, with “low-tier” firms facing the most challenging conditions. Small business confidence eased in the March quarter 2016, potentially reflecting the effects of the recent financial market turmoil, although forward-looking measures improved slightly.

Business conditions unchanged at +3, slightly below the long-run average. Business confidence eased to the neutral mark in the March quarter.

The NAB SME Survey is the leading business survey of small businesses in Australia, and complements the comprehensive Quarterly NAB Business Survey. It offers a rich repertoire of insights into factors affecting smaller firms’ conditions by state, industry and size, as well as an assessment of their outlook for investment and output.

According to NAB Group Chief Economist Alan Oster, “While business conditions for SMEs have continued to lag behind the broader business community, they have been relatively resilient, supported by strong trading conditions in particular. However, the employment index failed to show the pick-up evident in the NAB monthly and quarterly business surveys.”

In general, services sectors continued to outperform more traditional sectors in the quarter, although some of the earlier strong performers, such as finance, business and property services, appeared to have lost some momentum in Q1. This potentially reflects a slowing housing market nationally which is placing some pressure on small businesses in property and finance sectors in particular, and their conditions could worsen if the housing market cools further. That said, the strength in hospitality and health sectors continued. Mr Oster notes that “services targeted at households and tourists, such as health and accommodation/cafes/restaurants, continue to do very well. Lower energy costs might have also benefitted intermediary services such as wholesale and transport, of which conditions improved significantly in the quarter.”

SME business conditions were stronger in most states in the quarter, except for NSW and VIC. That said, NSW (at +8) was still the top performer. “On a state by state basis, NSW and Victoria remain the most resilient in terms of business conditions, but we were positively surprised by the strong gains in Qld which recorded its first positive reading (at +1) in 2 years. This offers another indication that the non-mining recovery is gaining momentum. Meanwhile, conditions in the mining/part-mining states of WA and SA remain negative,” said Mr Oster.

Business confidence eased in the March quarter to the neutral mark, below its long-run average of +2. According to Mr Oster, “SMEs experienced a fall in confidence in Q1, which potentially reflected increased concerns by respondents in the quarter about financial market volatility and slowing global growth prospects. However global financial conditions have stabilised since the survey was conducted and the fall in confidence in the quarter could prove to be transitory.”

Forward-looking measures such as capacity utilisation and forward orders improved slightly in Q1, with the latter remaining well above its long-run average. Mr Oster said “Strong forward orders and relativelyresilient capacity utilisation continue to point a moderate expansion in small business activity over the course of 2016. Encouragingly, measures of capital expenditure also picked up in the quarter, led mostly by services sectors.”

Overall we remain generally optimistic about the near-term performance of the Australian economy and labour market, especially on the east coast of Australia. However, the lack of risk in adding a touch of stimulus given low inflation has prompted NAB Economics to change its interest rate call and now expects the RBA Board to endorse a 25bps rate cut at its May Board meeting. “This is a really fine judgement on our part of a 55%/45% chance of a cut, reflecting the Bank’s ability to do slightly more to reduce Australia’s unemployment rate given the low inflation environment in Australia revealed by yesterday’s very low core CPI outcome and the prospect that in the near term at least, core inflation will run below the RBA’s target range”, said Mr Oster.

For further details, please see the attached document.