The aggregate level of business conditions dropped in November, falling to its long-run average for the first time since April 2015, which according to NAB suggests that the non-mining economy is “losing steam”.
The latest NAB Monthly Business Survey results revealed that the business conditions index (an aggregation of trading conditions (sales), profitability and employment) fell in November to +5 index points (from +7), its lowest level since April last year.
According to NAB chief economist Alan Oster, the result raises concerns regarding the direction of the nation’s non-mining recovery in the near term.
Mr Oster said: “We are becoming increasingly concerned about the underlying momentum in the economy as evidence mounts that the non-mining economy is losing steam. The downward trend in business conditions and signs of weakness in the Q3 national accounts, beyond one-off influences such as poor weather, lend further support to this view.
“For now though, we expect to see a fair degree of ‘bounce-back’ next quarter, before the economy resumes its relatively subdued growth track, characterised by muted domestic demand.”
Mr Oster pointed out that the outcomes across the industries were quite varied in November, with the retail industry continuing to be “a major drag” on conditions, along with mining.
“Transport has also performed poorly, although that might in part relate to the strength in oil prices following the recent OPEC agreement,” Mr Oster added.
He also highlighted that the deterioration of business conditions in November was largely driven by profitability and trading conditions (sales), with employment conditions steady at already “subdued” levels.
“Soft outcomes for employment conditions are a concern, and suggest that the labour market is only barely generating enough jobs to keep the unemployment rate steady,” he said.
“On a more positive note though, the survey suggests that ABS labour force data may be overstating the current weakness in employment growth.”
Mr Oster concluded that if the weaker trend in the survey continues over the coming months, it would be a “fairly definitive” sign that the non-mining recovery has “run out of steam”.
He emphasised that for now, the weak Q3 GDP result should be enough to warrant the anticipation of ‘bounce-back’ in the coming quarters.
“However, both the housing construction cycle and commodity exports are expected to peak fairly soon, compounding the growth challenge further out,” Mr Oster said.
“Meanwhile, the rally in commodity prices is expected to be short-lived, and is unlikely to translate into higher investment or wages at this point in the commodity cycle. 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,” he concluded.
Business confidence remains ‘relatively resilient’
Meanwhile, the business confidence index rose to +5 index points from +4, which Mr Oster said is “encouraging”, particularly in light of numerous global uncertainties and weakening business conditions.
However, he pointed out that it is not yet certain what effect, if any, the recent US election results has had on confidence.
“While confidence has been relatively resilient, it is not at levels conducive of higher levels of investment activity – confirmed by disappointingly soft investment intentions in the recent ABS Capex Survey,” Mr Oster said.
“Nonetheless, the capex measure in the NAB Business Survey remained positive this month, consistent with an increase in capacity utilisation rates, although forward orders remained soft.”
In trend terms, all industries are reporting positive confidence levels, but manufacturing (+8) was the most confident, while personal services is weakest (at +3).