Business confidence lifts from late 2012 lows but still below average. That reflects better global confidence, stronger equity prices and lower borrowing rates at home. Conditions still subdued and with marked weakness in trade and consumer dependent sectors. Forward indicators and medium-term expectations still very poor. Capex expectations imply flat investment (falling in non-mining). Low price pressures imply soft Q1 core inflation.

• Business confidence improved significantly in the March quarter – the first quarterly rise in sentiment since December 2011. That said confidence still remains below long-run average levels. Much of the improvement in confidence reflects the unwinding of concern surrounding a number of external risks, including the US fiscal cliff, a hard landing in China and the reduced risk of a further European crisis. While equity price rises and lower borrowing rates are also likely to have helped, it appears the still high AUD remains concerning for the trade dependent industries.
• Business conditions strengthened modestly in the March quarter, after weakening to their lowest level since June quarter 2009 in the previous survey. That said, business conditions are still clearly signaling below trend growth. Indeed, the NAB quarterly business survey points to domestic demand growth in March quarter 2013 of around 2¼%. More worrying forward indicators of demand remain subdued – notably forward orders, stocks and capital expenditure – suggesting activity will soften into the June quarter. There are indeed signs of that happening in the March Monthly Business Survey.
• The improvement in business conditions is almost entirely attributable to two industries; finance/ business/ property, which probably gained from rising equity prices and easier financial conditions, while lower borrowing rates appear to have helped to strengthen construction activity. Consumer and trade dependent sector conditions remained weak, implying that either lower interest rates need more time, or more stimulus (eg. RBA rate cuts) are needed to strengthen consumer demand. Conditions were little changed across mainland states in Q1, with the exception ofQueensland, where they lifted considerably.
• Business investment intentions (next 12 months) lifted a touch in Q1 but remained low relative to outcomes a year or two ago. Indeed, they imply flat investment growth over the next 12 months. This is consistent with NAB’s expectation for non-mining investment to take time to fill the approaching ‘gap’ from a slowing in mining investment. Near and longer term employment expectations ticked up but point to more labour market weakness. Lack of demand is expected to be the most significant factor impacting profitability over the next 12 months and concerns about tax & government policy remain important.
• Product price inflation remained subdued, recording annualised growth of just 0.2%. Retail price inflation was also soft and implies a soft March quarter underlying inflation outcome. Labour and purchase costs growth remained modestly below-average levels.

For further analysis download the full report.

• Quarterly Business Survey – March 2013 (PDF 335KB)