- Australian business conditions and confidence fell sharply in May, according to the NAB.
- Lead indicators in the survey weakened, pointing to a moderation in activity levels in the months ahead.
- Confidence levels in NSW and Victoria, where capital city home prices are falling, remain the weakest.
Australian business conditions fell sharply in May, according to the National Australia Bank’s (NAB) monthly business survey.
The headline conditions index — a composite measure of sales, profitability and employment intentions — fell six points to +15, pulling back from the record levels seen a month earlier.
The positive reading indicates that a majority of firms surveyed believe that conditions continued to improve in May, just not as many as April.
As seen in the table below from the NAB, the decrease was driven by weaker results for all three readings, reversing the improvement seen in April.
“Trading conditions (sales), profitability and employment conditions reversed their gains made in April but all remain at a relatively high level,” said Alan Oster, chief economist at the NAB.
“Despite the easing in the business conditions index, conditions remain robust in the business sector. Conditions remain well above average across most states and industries.”
Oster said the decline was broad-based in nature with conditions easing in all industries except for transport/utilities and retail.
In trend terms, conditions are strongest in mining sector, followed by finance, business and property, recreation and personal services and transport and utilities.
Despite the modest improvement in May, conditions in the retail sector remain the weakest across the nation.
On the decline in the employment subindex which fell by five points to +8, Oster said the result points to solid, rather than spectacular employment growth, in the months ahead.
“While the employment index dropped in May, following a strong result in April, it remains above average and suggests a solid pace of employment growth over coming months,” he said.
“The survey continues to suggest an improvement in labour market conditions going forward, which we would expect to translate to a gradual pick-up in wage growth over the next year.”
However, disappointingly, there were few signs in the May report that suggest wage or inflationary pressures are building, Oster said.
“Surveyed wages and inflation variables continue to suggest low wage and price growth,” he said.
“Retail price growth tracked sideways after picking up in April though remains low while purchase cost growth rose to its highest rate since late 2015 in the month.
“Final product prices and labour cost (wage bill) growth edged up in May but remain around their average level over the last year.”
The increase in labour and purchase costs, faster than the lift in final product prices over the same period, suggests margin pressures have intensified in recent months.
Mirroring the reversal in the headline conditions index, the NAB said lead indicators on activity levels — forward orders and capacity utilisation — also softened during May.
This points to the likelihood that activity levels may also weaken a touch in the months ahead, continuing the trend seen in May.
Measures on CAPEX plans and exports also softened during the month.
With current conditions weakening and forward indicators pointing to similar outcomes in the months ahead, the separate business confidence index also declined, falling five points to +6, leaving it around historic norms.
“On a trend basis, mining and construction remain the most confident,” said Oster, adding that at the other end of the spectrum, confidence remains the weakest in recreation and personal services, wholesale and transport and utilities.
Interestingly, confidence levels are currently the weakest in New South Wales and Victoria, Australia’s most populous states, masking stronger outcomes in other pasts of the country.
“Confidence is highest in trend terms in Tasmania and Western Australia,” Oster said.
“Queensland and South Australia are slightly above the National average while New South Wales and Victoria continue to lag the other states at below average levels.”
The divergence may reflect that property prices in Sydney and Melbourne, from a broad perspective, are falling at present, bucking the trend seen in most other Australian capital cities.
Based on the results found in May survey, Oster says it still points to broad-based strength across most industries and states, and the likelihood of tighter labour market conditions.
“Both business conditions and leading indicators continue to suggest a pick-up in economic growth and that, over time, jobs growth should see the unemployment rate fall towards 5%,” he says.
“The outlook for the labour market and evidence of a pick-up in wage growth remain key for monetary policy. Evidence of a genuine pick-up in wages growth and a flow-through to inflation more broadly will provide a launch pad for the RBA to begin lifting rates from current record lows.”
On that score, Oster doesn’t expect that will begin until the middle of next year.
“We don’t expect this to occur until May 2019, as while the survey continues to point to a growing economy, strength in employment and a decline in the unemployment rate, these factors are yet to materialise in a significant pick-up in wages,” he says.
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