Business confidence and conditions are below average: NAB's Alan Oster

EXPERT OBSERVER

Business conditions fell 2 pts to +2 index points in July, driven by a decline in the employment sub-index. Trading conditions also edged lower, while reported profitability increased slightly in the month. All three sub-indexes are now again below average, with the decline in business conditions evident across most industries outside of mining over the past year.

Business confidence edged higher in the month to +4 index points, but remains below average. The lift in confidence was broad-based across industries in the month. Overall, in trend terms, business confidence remains highest in mining, as it has for some time. Outside of mining, finance, business & property services remain most optimistic, while confidence is softest in manufacturing and recreation & personal services.

Business conditions declined slightly in the month. As we have noted in previous months, the decline in business conditions since early 2018 has been broad-based and has continued to track at below average levels in recent months. This is concerning, because while conditions remain positive, it points to a significant loss in momentum in the business sector.

Business confidence ticked-up in the month, following an easing last month, but is also below average. While there were some positive signs with a post-election lift in confidence, this bounce now looks to have been short lived with confidence also tracking at below average levels in the two months since the election.

Business confidence in the retail sector saw a reasonable lift, likely related to the government’s tax cuts, but quite worryingly there appears to have been little boost to activity in the sector with conditions weakening further – the sector is currently facing recessionary levels of activity according to our measure.

Forward-looking indicators remain weak. Forward orders edged higher in the month but remain negative and well below average while capacity utilisation unwound its sharp spike last month and is now again just below average.

Looking at the components of the survey that provide an indication of conditions going forward, we see little improvement. With both forward orders weak, and capacity utilisation a bit below average – both capex and employment growth are at risk

With a significant loss of momentum in activity, and inflation indicators remaining weak, the survey points to the need to the need for further stimulus in the economy. Indeed, we expect a further easing in interest rates from the RBA and think that some greater fiscal support will be needed from the government to kickstart growth.

Alan Oster is the NAB Group Chief Economist