‘WATERSHED MOMENT’: Why the sudden plunge in Australian business conditions could signal a ‘significant slowing in the economy’

  • The boom times for Australian businesses came to a shuddering halt late last year.
  • Business condition plunged to the lowest level in over four years with the deterioration broad in nature.
  • Westpac Bank says the decline could prove to be a “watershed moment”, pointing to a “significant slowing in the economy”.
  • If conditions fail to improve materially in January, economists say the RBA may have to abandon its half-glass-full outlook for the Australian economy.

The boom times for Australian businesses came to a shuddering halt late last year, according to those businesses surveyed by the National Australia Bank (NAB).

Operating conditions tanked by the most since the GFC, falling to levels not seen since late 2014.


The deterioration was broad-based in nature, be it by industry or location, amplifying concerns about a slowdown across the economy.

According to Westpac Bank, the scale of deterioration reported could prove to be a watershed moment for the economy should they be replicated in reality.

“If the December update is accurately describing conditions across the Australian economy then this is a watershed moment,” says Andrew Hanlan, Senior Economist at Westpac Bank.

“At face value, the fall in business conditions over the second half of 2018 suggests a significant slowing in the economy.”

Hanlan says the sharp reversal in Australian housing market conditions was likely a “key development” in the latest survey.

“New home building activity has swung from strong gains over the first half of 2018 to declines in Q3 and beyond,” he says.

“Dwelling prices in Sydney and Melbourne have pulled back, following sizeable gains, and consumer sentiment slipped into the pessimistic zone in January, albeit only marginally.”

Hanlan notes the plunge in conditions, leaving them at the weakest level since September 2014, brings the NAB index back to where it sat just before the prior cyclical upswing in Australian home prices occurred, hinting that the downturn in the housing market was partially responsible for the December result.

According to CoreLogic, Australian capital city home prices fell by the most since 1983 in December. Based on data received so far this month, similar losses are likely to be seen again in January.

Along with the domestic housing market, Hanlan says a clear loss of momentum in the global economy late last year also fits with the deterioration reported in business conditions.

Like Alan Oster, the NAB’s Chief Economist, Hanlan says caution towards the December result is warranted given the impact of summer holidays, something that has often led to volatility in data in the past.

After the warning shot delivered in December, Hanlan, like many others, says it’s what happens next that will be of more importance.

“The key question is whether the December update is a ‘false read’ or a ‘watershed moment’,” he says.

That won’t be known until mid February when the NAB’s January survey is released. However, when it’s answered, it could have major implications for Australian financial markets.

“It will be important to watch the strength of any bounce back in conditions in coming months to gauge the extent to which momentum in the economy may be easing,” says Ivan Colhoun, Global Head of Research at the NAB.

“The moderation in conditions from very elevated levels over 2018 was not sufficient to stop unemployment declining. However, continued improvements in unemployment would likely be threatened if conditions deteriorated further.”

Colhoun says should no meaningful bounce in conditions occur in the January survey, it will only help to feed the growing view that the RBA may have to cut Australia’s cash rate further.

“It seems hard for the RBA to be as confident about the outlook for growth, unemployment or interest rates given recent developments in the December survey,” he says.

“It suggests very little prospect of an interest rate rise this year and a larger risk that the next move in rates may be down, though the NAB is still more inclined to forecast a longer period of on-hold rates before an eventual move higher.”

Jack Chambers and David Plank, economists at ANZ Bank, suggest the signals from the NAB survey point to waning momentum in the economy, especially given they fit with a deterioration in other cyclical indicators.

“The drop in conditions lines up with other indicators, such as motor vehicle sales and building approvals, pointing to a sharp loss of economic momentum,” they say.

Anecdotes also point to a very weak December for retail sales.

“This provides a challenging backdrop for the RBA’s forecast update, especially given the prospect that credit conditions are continuing to tighten,” the ANZ economists say.

“The RBA is generally slow to shift its underlying view, but the case for a material shift is building.”

The RBA will deliver updated economic forecasts on Friday, February 8. Before that, the bank will also announce its first interest rate decision for the year next Tuesday ahead of a speech from Governor Philip Lowe on Wednesday.

Whether a “material shift” in RBA mindset occurs next week could well be determined by Australia’s Q4 inflation report that will be released today. A big undershoot on expectations will only fuel the belief of markets that current monetary policy settings are inappropriate.