Business survey suggests economy might be stabilising, signal caution at likelihood of rate cut: NAB

Hopes the Australian economy might be snapping out of its funk have been boosted by the better-than-expected National Australia Bank business survey for September, which shows conditions and confidence shrugging off months of weakness.

"While overall conditions remained fairly soft in September, the pickup in activity implies a shift in momentum towards a more expansionary economy, compared to an economy that had previously appeared to be losing traction," the bank says.

NAB attributes the lift in business confidence, particularly in manufacturing, to the sharp fall in the Australian dollar and speculation of a rate cut or two, but says the survey also highlights a "structural" shift towards "mining and service-based industries, and away from traditional manufacturing and discretionary retailing."

It adds the survey "signal[s] caution about the likelihood of monetary policy being loosened in the near term, although the odds of a rate cut are clearly highly following the slowing in global growth and financial market volatility."

The bank says while near-term activity remains soft, it expects a "medium-term rebound in the Australian economy", with gross domestic product growth of 1.9% this year, and 4.1% in 2012, with core inflation at 2.5% over next year 12 months.

"As such, we expect the RBA will need to lift rates by late 2012. However, in the near term, the RBA is more dovish and there is now a 50/50 chance of a reduction in the cash rate in coming months if inflation remains subdued and domestic demand and the labour market weakens further."

NAB says the survey, released this morning, shows that the "variation in business conditions across sectors has become increasingly pronounced since late 2009." It says this divergence "indicates that the Australian economy is undergoing a structural transformation towards mining and service-based industries, and away from traditional manufacturing and discretionary retailing."

Business conditions improved in all industries except personal and recreational services, which remained at strong levels.

While manufacturing conditions lifted over the month, that sector – alongside construction, retail and wholesale – remain at "depressed levels," the bank says. "

Business conditions lifted 5 points, from -3 to +2 index points, after two months of declines but remain lower than the long-term average. Meanwhile, trading conditions lifted 8 points to +5, profitability edged up 4 points to -2, and employment rose 3 points to +3.

Business confidence lifted 7 point to -2 – a result dubbed a "much better outcome than what could have been envisaged given the heightened uncertainty and volatility enveloping the global economy at present."

The largest pick up in confidence was in manufacturing, followed by finance/ property/ business, transport & utilities and retail. The weakest confidence levels were recorded in wholesale (-13) followed by construction (-9).

The survey also showed that labour costs eased, after two months of solid gains.

The survey follows the release of ANZ jobs data yesterday, which showed the number of job ads published during September fell for a third consecutive month.