Australia is in the midst of a 'buoyant non-mining recovery'

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Australian business conditions rebounded strongly last month while confidence levels held steady, providing evidence that Australia’s non-mining recovery strengthened further in the early parts of 2016.

That’s the pleasing findings of the latest NAB Australian business survey for February with the bank’s chief economist Alan Oster suggesting the result “confirms continuing non-mining momentum in early 2016”.

While the survey’s headline confidence measure held steady at +3, the separate conditions index jumped from +5 to +8, leaving it at the highest level seen since November last year.

“The survey recorded a rebound in business conditions during February, suggesting the non-mining recovery has not wavered,” said Oster. “Business conditions hit a level that is well above the long-run average, following big improvements in the major mining states of Western Australia and Queensland, as well as more moderate increases in NSW and South Australia.”

“It confirms that low interest rates and a more competitive AUD are clearly having the desired effect,” said Oster.

As the table from the NAB shows below, the three subindices that make up the conditions index — trading, profitability and employment — all recorded solid improvements during the month.

Adding to continued strength across the nation’s services sector, conditions for mining, manufacturing and construction firms also rebounded after falling heavily in January.

“Conditions in both mining and wholesale still managed to bounce back from large declines last month,” said Oster. “Elsewhere, construction also improved, consistent with ongoing strength in the residential sector.”

The improvement in those sectors, along with continued strength in services, ensured the strong rise in operating conditions during the month.

“Services remain the clear out performers in terms of business conditions,” says Oster. “(They) have very much stepped up and are now driving an impressive rebound in non-mining domestic demand”.

As opposed to the bounce in business operating conditions, Oster suggests that confidence did not reap the benefits of higher conditions although, given heightened levels of uncertainty towards the global economic outlook over the survey period, he called the result “encouragingly resilient”.

Despite the steady confidence read, leaving it below the survey’s long-run average, there was further good news to come from the February report, this time on business investment.

“There was a strong kick-up in reported capital expenditure by firms in the survey,” Oster notes.

“This, together with strong profits and falls in spare capacity, suggest that prospects for business spending and employment are improving.”

With the economy searching for sources of growth outside of household consumption and residential construction, Oster believes this is very good news for the economy.

“Business investment is critical to future economic growth, so we are constantly looking for signs that non-mining investment is starting to fill the void left by mining projects. We are finally starting to see signs of that happening,” says Oster.

As they have done for some time, the NAB suggests the strength in the non-mining sectors of the economy should see the RBA leave interest rates on hold for an extended period, bucking the view held by markets that the bank will deliver another rate cut later in the year.

“Much still depends on global uncertainties and whether global contagion ultimately weakens momentum in the domestic non-mining sector -– and hence unemployment,” suggests Oster. “AUD strength is another risk.”

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