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Business conditions reach lowest level since January

Business conditions have reached their lowest level since the start of the year, new research has revealed.

According to the NAB Monthly Business Survey, business conditions (an aggregation of trading conditions (sales), profitability and employment) in August 2016 dropped from +9 index points to +7, the lowest level since January.

However, the bank noted that while conditions has dropped, the index is still above its long-run average level of +5, and has consistently remained above this level since early 2015.

There continues to be a fairly large disparity in business conditions across industries, although most are recording positive conditions in trend terms.

NAB chief economist Alan Oster commented: “The recent downward trend in business conditions suggests that the non-mining recovery may have lost some vigour, but headline results from the survey still suggest these segments are performing well.

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“The strength in business conditions remains largely confined to the major services and construction industries, while relatively subdued conditions in wholesale and retail warrant close monitoring, particularly in light of disappointing consumption growth in the Q2 national accounts.

“We had been hoping to see more consistent signs of a broadening economic recovery in the survey now, and this did appear to be the case earlier in the year but it has not been sustained.”

The survey showed that trading conditions and profitability had been the main drivers of elevated business conditions previously, but while both of these eased in August, employment conditions held steady — pointing to ongoing employment growth.

Inflation measures in the survey generally stayed soft, with retail prices pulling back sharply.

Business confidence remains strong despite concerns over future

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Despite business conditions hitting their lowest levels yet this year, the survey showed that business sentiment has proven to be resilient to negative influences over recent months, which "has flowed through to more stable (and above average) levels of labour demand".

The business confidence index rose slightly to +6 index points in August (from +4), which NAB says is consistent with the long-term average of +6.

The survey reads: “Solid outcomes for business conditions have likely underpinned business confidence in recent months, but the RBA’s 25 basis point cut to the cash rate may have further bolstered sentiment in August — although the improvement in confidence was not broad based.”

It adds: “Beyond the near-term, as the effects of previous AUD depreciation, higher commodity exports and the housing construction cycle begin to wane, the outlook becomes more uncertain. All of these factors are expected to come to a head around 2018, and the economy will likely require additional policy support from the RBA ahead of this to firm up growth and stabilise the unemployment rate.”

NAB economics said it currently expects two more 25 basis point cuts by the RBA in mid-2017.

Mr Oster concluded: “The survey still gives us confidence in the near-term outlook for the economy, even though things may have cooled a bit … [but] the survey is yet to reflect our growing concerns over the longer-term outlook.

“We expect the economy will see a material slowdown in 2017/18 as resource exports slow and residential construction begins to dry up.”

[Related: Business conditions and confidence slips]

Business conditions reach lowest level since January
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Annie Kane

Annie Kane is the editor of The Adviser and Mortgage Business.

As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts. 

Contact Annie at: This email address is being protected from spambots. You need JavaScript enabled to view it.

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