The outlook looks bright for Australia's business sector

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Things are looking bright for Australia’s business sector in early 2018.

Business confidence and conditions are far stronger than in recent years, providing an optimistic outlook for investment, employment growth and the broader Australian economy.

That’s the pleasing new from the latest National Australia Bank (NAB) Australian Business Confidence Survey for December with trading, profitability and confidence all improving from already lofty levels during the month.

Alan Oster, Chief Economist at the NAB, said there was a noticeable improvement in confidence in the latest survey, helping to narrow the gap to the separate conditions index which remained at elevated levels.

“The business confidence index bounced 4 points to +11 index points, the highest level since July 2017, perhaps driven by a stronger global economic backdrop. The jump has reversed the downward trend that had been apparent since around mid-2017,” he said.

“This has helped to narrow the perplexing gap between business conditions and confidence evident over the past couple of years, and is an encouraging signal for investment.”

The narrowing between the NAB’s headline confidence and conditions indices is evident in the chart below.

Source: NAB

And while operating conditions didn’t mirror the improvement in confidence, Oster said they remain at elevated levels, helped in part by strong sentiment towards profitability and trading conditions.

“Both sales and profitability gained on already high levels, while employment conditions eased back a touch,” said Oster, noting that the movements in all three subindices saw the headline conditions index hold at +13 for a second month.

The breakdown of the December survey is seen in the table below.

Source: NAB

While the employment subindex did ease a touch from November, Oster says it still bodes well for employment growth, and in all likelihood lower unemployment, in the coming months.

“The employment index implies employment growth of a little less than 300,000 at present, and a slowdown to around 240,000 per annum over the next 6 months, or a monthly pace of around 20,000 per month,” he says.

“While suggesting some pull back in employment growth, this should still be sufficient to see the unemployment rate inch downwards, assuming no further large increase in the participation rate.”

Australian employment grew by over 400,000 in 2017, according to the ABS’ seasonally adjusted series, something Oster says maybe “overstating” the degree of job creation that’s taking place in the Australian economy at present.

Adding to the optimistic outlook for not only business but the broader Australian economy, the survey’s lead indicators — capacity utilisation, CAPEX expectations and forward orders all held at elevated levels in the latest survey.

“Capacity utilisation picked up to 82.2% in December, well above the long-run average for the monthly survey of 81.1%,” says Oster.

“This bodes well for business investment, although surveyed capex pulled back a little this month.

“Forward orders also eased a little, but on the whole are suggestive of solid momentum in non-mining activity in late 2017 and into early 2018.”

Putting it all together, Oster said the December survey points to a continued acceleration in Australian economic growth in the coming quarters.

“There continue to be a number of significant challenges to the outlook, but we remain hopeful that Australia will see temporarily above trend economic growth in coming quarters, thanks to support from improving business investment and elevated levels of infrastructure construction,” he says.

And despite pockets of concern around the housing market, he says that increases the likelihood that the Reserve Bank of Australia (RBA) will lift official interest rates in the second half of the year.

“Such an outcome should be sufficient to prompt the RBA to consider a gradual removal of emergency policy stimulus, although the RBA will need to see wages growth move upwards, at least gradually,” he says.

“We maintain our expectation for the first RBA hike to come in the second half of this year, but only if the labour market and wages improve further and the property market holds steady.”

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