Australian business confidence slumps despite stronger operating conditions

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  • Australian business confidence fell to the lowest level in over three years in March despite a noticeable improvement in operating conditions.
  • The employment subindex strengthened further, pointing to strong hiring and downward pressure on unemployment in the period ahead.
  • Businesses in Tasmania and in the mining sector are reporting the strongest operating conditions across the country. Retail conditions are still deemed to be very weak.
  • The NAB said the forward looking parts of the March survey suggest the improvement in operating conditions reported in March may not be sustained.

Australian business confidence fell to the lowest level in over three years in March despite a noticeable improvement in operating conditions.

The National Australia Bank’s (NAB) headline business confidence index fell to 0 during the month, the lowest level seen since January 2016. However, the separate conditions index rebounded sharply to +7 from +4 in February, driven by an improvement in perceptions towards profitability, trading conditions and hiring.

NAB

“Survey results were mixed this month,” the NAB said in a statement accompanying the March report.

“Business conditions saw a welcome increase to above average levels with each subcomponent of the index rising.”

Of note, the employment subindex, at +7, points to a continuation of strong employment growth in the months ahead.

“The employment index remains well above average and has been a consistently positive survey indicator over recent months,” the NAB said.

“While it has eased through 2018, these levels imply employment growth of around 20,000 per month, enough to see the labour market hold onto recent gains.”

NAB

If correct, that suggests recent progress in lower Australia’s unemployment rate below 5% may continue in the months ahead, an important outcome given the RBA’s forecasts for inflation, economic growth and wage increases are underpinned by an expectation that jobs market conditions will continue to strengthen in the coming years.

Across the country, the NAB reported that perceived operating conditions remained the strongest in Tasmania, New South Wales and Victoria, in contrast to below-average opinions expressed by respondents in all other states,

NAB

“While conditions have declined across all states since their peak in early 2018, the east coast had generally seen better outcomes,” said Alan Oster, Chief Economist at the NAB.

“This has narrowed somewhat in the last month but of the mainland states, New South Wales and Victoria remain the highest. Tasmania continues to the see the strongest conditions overall.”

Similarly divergent views towards operating conditions were also seen across individual industries, as seen in the chart below from the NAB.

NAB

Conditions for firms operating in the mining, finance/property and recreational and personal services sectors are seen to be strong, a mood in stark contrast to those in other sectors.

Despite the broader improvement in perceived operating conditions last month, Oster cautioned that the survey’s forward-looking indicators — seen as a guide on conditions in the future — suggest the rebound seen in March may not last.

“While the increase in conditions is a positive outcome given the weakening across a range of other macro indicators, the forward looking parts of the survey suggest that there is some risk to this falling away,” he said.

“Forward orders are weak, and below average, and capacity utilisation is now back to around average”.

Of note, the latter is seen as influential on the outlook for hiring and capital expenditure ahead, generating continued uncertainty as to whether or not businesses will be willing to invest for the future.

“We will continue to watch the survey closely over coming months,” Oster said.

“With activity having already slowed, it is important to assess whether this is temporary or has persisted into 2019 — the survey suggests this may be the case, at least in the March quarter.

“For now the survey suggests labour market conditions have remained healthy but we are also watching this closely given it may well be a lagging indicator.”

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