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066309-national-australia-bank1-142x88NAB released its July monthly Business Survey this month.  The survey indicated that Business confidence again surprised on the upside, supported by better business conditions (largely reflecting sales and profits) and a surge in retailer confidence. Firms still appear unfazed about the Budget (for now). Conditions jumped to a four year high, but major improvements were across a narrow industry base with construction a standout.   Employment improved modestly, but remains subdued. Rates are forecast to remain on hold till late 2015 but risks of a cut are rising.


Business confidence improved again in the month, reverting back to post-election highs. Firms still appear unfazed by the Federal government's 'tough budget', possibly taking comfort in the bounce back in consumer confidence.   The survey showed a solid jump in business conditions and better forward orders which is supporting the relatively optimistic position. Stronger sales and profits are also driving the trend, but the recovery continues to be relatively jobless with the employment index seeing more moderate gains. Higher capacity utilisation rates suggest that the improvement is relatively capital intensive.

Business conditions rose in the month to their highest level since early-2010 – implying a strong start to Q3 demand. That said, much of the improvement is narrowly based.  Construction surged again, propped up by high levels of building approvals that will drive construction activity for many months. Wholesale (a bellwether industry) also improved, but remains slightly negative – and are somewhat contrary to the kick up in forward orders.

Changes in conditions varied across industries, as do the levels – construction and service industries are the stand out (mining and retail are weakest). In contrast to very strong readings for sales and profits, business is still very reluctant to employ.

NAB's wholesale leading indicator improved, but still suggests weak underlying conditions and below trend economic growth in the second quarter of 2014 – with moderate near term growth in prospect for demand.

Firms reported moderate inflation pressures, although input cost prices accelerated. Both purchasing costs inflation and labour cost pressures lifted, but expected to be temporary. Retail inflation also accelerated.

These survey results have had some impact on NAB's forecasts.  Global growth remains moderate but monthly trade and industrial growth continues to slow.  Economic conditions are mixed between regions with solid upturns in the UK and US, weakness in Japan and signs of slowing in the Euro-zone.  Emerging market economies are still driving most global growth with rapid Chinese growth, brighter signs in India but weakness in Latin America.

Weak retail trade and net exports point to soft GDP growth in Q2 when that is published. Employment continues to drift. Partial indicators are better but headwinds remain from high AUD, falling mining investment and fiscal restraint.  Australian forecasts were revised down in 2014/15 (3.1%, was 3.3%), up in 2015/16 (3.2%, was 3.0%). Official unemployment rate to peak at 6½% by end 2014 (was 6¼%) reflecting weaker growth and changes to ABS measurement (which probably added 0.2 points to unemployment). Cash rate forecast to remain on hold until late 2015 but more risk of a cut.
Source: NAB Monthly Business Survey August 12, 2014