Australian business conditions and profitability collapsed at the end of 2018

Mike Brown/Getty ImagesMike Brown/Getty Images
  • Australian business conditions deteriorated sharply late last year, tumbling by the most since the height of the GFC. They are now the weakest since late 2014.
  • The deterioration was broad-based across states and industries.
  • New orders declined and business confidence remained below trend, suggesting “conditions are unlikely to rebound”, according to the National Australia Bank.
  • The results fit with other business surveys conducted by the Ai Group and Illion that have also weakened noticeably in recent months.

  • Financial markets currently see around a 60% chance that the RBA will cut rates by the end of the year. We’ll hear a lot from the bank next week.

Australian business conditions deteriorated sharply late last year, tumbling by the most since the height of the GFC.

The National Australia Bank’s (NAB) Australian Business conditions index, contained its broader Business Confidence survey, tumbled to +2 points in December, down sharply from +11 points in November.

It was the biggest one-month drop since the GFC, and left overall business conditions at the weakest level since September 2014.

NAB

“Business conditions fell sharply in December, and while caution should be taken when interpreting data around the Christmas/New Year period, this outcome continues the downward trend in conditions over the second half of 2018,” said Alan Oster, Chief Economist at the NAB.

“At face value, the fall over the past six months suggests a significant slowing in the momentum of activity in the business sector — especially from the highs seen earlier in the year.

Making the decline all the more ugly, and worrying, Oster said the deterioration was relatively broad-based, be it by location or sector.

“The deterioration… was driven by declines across trading, profitability and employment, and was relatively broad-based across states and industries,” he said, pointing to the chart below showing the drop in business conditions reported across the country.

NAB

“Conditions remain particularly weak in the retail industry which reports further ongoing deterioration.

“Capacity utilisation remains above average, though forward orders are below average and falling. Alongside below average business confidence this suggests conditions are unlikely to rebound.”

As seen in the table below, the three subindexes that comprise the conditions index weakened from November, particularly readings for profitability and trading conditions that fell sharply.

NAB

“The result was driven by declines in all sub-indexes with employment falling five points to +4 index points, profitability falling 8 points to 0 index points and trading conditions declining to +7 index points,” Ostar said.

For unemployment looking ahead, the NAB said the employment subindex, at +4 points, signals a slowing in employment growth ahead.

“At face value, the decline in the employment index suggests a slowing in the pace of employment growth to 18,000 per month from 22,000 per month,” Oster said.

While not pointing to dire hiring levels by any stretch, disappointingly, particularly for the RBA and Australian workers, the latest survey pointed to a further easing in wage and inflationary pressures.

“Surveyed measures of prices and wages eased in December. Notably, retail prices were flat in the month,” Oster said.

“Overall, these measures suggest that inflationary pressure remains weak, with final products prices and input prices such as purchase costs and labour costs continuing to track at relatively low levels.”

So no sign that unemployment, even sitting at multi-year lows in December, is doing anything to boost wage and inflationary pressures.

That’s a concern, especially with business confidence, as Oster points out, remaining entrenched at below-average levels at +3 points in the latest survey, unchanged from the level reported in November.

Accompanied by a drop in new orders, Oster says the signals from the December report should be of concern, particularly if maintained or built upon in the months ahead.

“With conditions having weakened notably in December following a trend slowing over the second half of 2018 we will be looking to the next readings from the business survey to confirm if the true underlying pace of business activity has slowed as sharply as the December survey suggests,” Oster says.

“With confidence remaining below average and forward orders having also declined our expectation is that, at the very least, a significant portion of the decline in business conditions will persist.

“If business activity has significantly slowed there could be some implications for the labour market and business capital expenditure (CAPEX) — two important variables whose outlook are critical for our outlook in 2019.

NAB

While readings on capacity utilisation and forward hiring held up in the latest survey, the steep, broad-based deterioration in business conditions across the country are unlikely to be welcomed by the RBA, especially as it’s banking upon non-mining business investment and strong labour market conditions to keep Australian GDP growth running above 3% both this year and next.

Unless that eventuates, the RBA’s expectation for a gradual decline in unemployment and gradual lift in wage and inflationary pressures is unlikely to occur, and will only feed into growing expectations that it may have to cut its cash rate further in the year ahead.

Financial markets already see the prospect of a 25 basis point rate cut by the end of this year at around 60%, mirroring the shift in mindset seen from an increasing number of economists who also expect the next move in the cash rate to be lower.

The latest survey was conducted between January 8 to 14, a period when financial markets were recovering sharply from a steep plunge in cyclical assets seen late last year.

The themes of the NAB survey also fit with those seen in separate PMIs on Australia’s manufacturing, services and construction sectors released by the Ai Group earlier this month. They also align with sentiment expressed by Australian business executives in the latest Illion Business Expectations Survey.

Combined, all suggest the momentum in Australia’s business sector is slowing, and fast.

NOW READ: One of Australia’s best inflation forecasters says a big downside miss is coming this week

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.