Boom times are back for Australian business and that's good news for the economy

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Business is booming in Australia to start 2018, with companies reporting that current operating conditions remain elevated near all-time highs.

The NAB Business Survey for January shows business conditions index rose to a reading of +19 — a gain of +6 from the previous month and well above the long-term average of +5.

And the future outlook is also optimistic, as the business confidence index climbed by +2 points to a reading of +12 — the highest level since April 2017.

It marks the second straight month of gains in the measure of business confidence, which was trending lower in the second half of last year.

Source: NAB

The latest rise in business conditions was driven by a sharp increase in the sub-index trading and profitability in January.

The sub-index for employment held steady, and “remains consistent with a solid rate of job creation of approximately 20,000 per month”, NAB said.

“The business conditions index has been relatively volatile in recent months, with changes in seasonal patterns playing a part, however on a trend basis conditions remain elevated,” NAB said.

NAB’s chief economist Alan Oster also said the leading indicators in the survey were broadly positive.

“While forward orders have eased a little they remain above average and capacity utilisation has been trending up which is a good sign for both future investment and employment” Oster said.

Source: NAB

By industry, the construction sector continues to lead the way with most other sectors reporting “solid to strong” operating conditions. Although retail continues to lag behind, the sector reported its strongest conditions in seven months in January.

“Construction confidence has also picked up in recent months despite headwinds coming from a softening housing market, particularly in Sydney,” NAB said.

“This probably reflects the still elevated residential construction pipeline, infrastructure construction and the lift in nonresidential building approvals last year.”

And in a reflection of the strong January report, NAB said business conditions remain solid across all the states — with Tasmania reporting the highest increase in trend terms (+24) in January.

“Conditions in Queensland (+18), NSW (+17) and Victoria (+14) are also at high levels, while SA (+9) is also reporting above-average levels despite some recent declines.”

“The December improvement in conditions in WA was largely maintained into the start of 2018 (at +7 index points),” NAB said.

The latest NAB survey provides further evidence of the underlying strength in Australia’s economy.

Recent analysis from Macquarie showed that NAB data for the December quarter indicates the outlook for near-term demand growth (excluding mining investment) looks strong:

In highlighting its key themes of the month, NAB said the steady increase in capacity utilisation is a positive signal that non-mining investment is set to rise.

The data is consistent with the most recent quarterly figures from the ABS on private sector capital expenditure, with estimates for total CAPEX spend in the 2017/18 financial year revised up to $108.9 billion.

And despite another sharp increase in trading and profitability conditions for Australian businesses, NAB said any transition into higher wage growth for Australian workers is likely to be slow and gradual.

To illustrate that point, NAB created a wage growth proxy based on the labour costs measure in the monthly busines survey, adjusted for changes in total employment:

Source: NAB

“While the wage growth proxy points to higher growth than reported in the WPI, it does not have the same recent pick-up as Business Survey labour cost measure,” NAB said.

“Rather, it points to an extended period of broadly stable, modest, wages growth.”

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