Monthly Business Survey – April 2012

Businesses remain confident of better near-term activity but actual conditions weaken in April – with multi-speed element widening again. Forward […]


Businesses remain confident of better near-term activity but actual conditions weaken in April – with multi-speed element widening again. Forward indicators remain lacklustre, with a material decline in capacity utilisation signalling increased slack in the economy – and further weakness in the labour market ahead. More rate action to come, although how much depends on the extent of fiscal retrenchment.

  •  In April, businesses remained quietly confident that activity will pick up in the near term. Part of the improvement in sentiment may reflect increased speculation of further rate cuts after official data confirmed that underlying inflation remained subdued in the March quarter (the survey was taken before the RBA lowered the cash rate by 50 basis points at its meeting in May). However, weakness in near-term growth and the fiscal tightening may be weighing on hiring and investment intentions.
  •  Business conditions fell back in April, unwinding the gradual improvement in activity that was occurring in the early months of this year. The fall back in conditions in April reflected a weakening in profitability and trading conditions, which were offset by a slight improvement in employment conditions. That may well mean that employment growth will weaken further in the face of poorer activity outcomes. Forward indicators of demand were fairly lacklustre, with capacity utilisation falling to its lowest level since mid 2009 – this in part reflected a heavy deterioration in utilised capacity in the manufacturing sector. Overall, the survey implies underlying demand growth in the June quarter may have slowed to around 3% and GDP growth of around 23⁄4%.
  •  Conditions deteriorated across all industries in April, with the exception of mining and retail – with the latter’s sales boosted by further aggressive discounting. Transport & utilities reported a heavy deterioration in conditions, after improving significantly in recent months, while manufacturing conditions also weakened considerably. Mining continued to outperform all other industries, while manufacturing conditions remained worryingly low. Conditions in Victoria deteriorated significantly, with this state now clearly under performing all other mainland states.
  •  Demand for credit also weakened further – with a new high (69%) of respondents reporting that they did not want credit in April.
  •  Labour costs growth ticked up in April, which was consistent with the slight improvement in employment conditions, while purchase costs growth picked up modestly. However, product prices growth was unchanged and very subdued, suggesting that overall margins had been squeezed in the month. The tightness in margins is likely to be very pronounced in the retail sector at present, with retail prices falling significantly in April.

Implications for NAB forecasts:

The survey suggests that the economy is continuing to struggle with the structural adjustments caused by the mining boom. The fiscal settings in tomorrow’s Budget will need to be watched closely – aggressive tightening of policy could well exacerbate an already weakening economy implying the need for more aggressive offsetting monetary policy action.

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