Australian business conditions reversed sharply in November after hitting an all-time high the previous month.
The NAB’s monthly survey of Australian companies showed business conditions declined to a reading of +12 — a 9 point drop from October — with steep monthly falls in trading and profitability.
In addition, the sub-index for business confidence fell 3 points to a reading of +6 — part of a broader downtrend in the second half of the year.
The Australian dollar declined slightly in the wake of the release, a short time ago trading at 0.7520 US cents.
While the measure of confidence suggests that Aussie businesses are cautious in their outlook, the reading for domestic business conditions remains comfortably above the long-term average of +5.
NAB chief economist Alan Oster wasn’t surprised to see a level of mean reversion in the data given the equally sharp rise the previous month.
“We expected to see last month’s spike in business conditions unwound fairly quickly as it both came as a bit of a surprise, and was also out of sorts with what we were seeing in some of the other leading indicators from the survey, such as forward orders,” Oster said.
“We are paying close attention to what now appears to be a downward trend in business confidence as that could naturally have some implications for decisions around hiring and investment.”
While the sharp gains in trading and profitability were unwound in November, Oster noted a pickup in forward orders — an area that’s often correlated with increased activity in the non-mining sector.
And interestingly, the November data showed the reading for labour costs rose to 1.2% after edging lower to 0.8% in the previous month.
The outlook for wages remains a key factor in Australia’s broader growth prospects — an issue reflected in last week’s Q3 GDP accounts which showed subdued consumer spending offset by increased business investment.
“NAB’s employment index has been reassuringly steady over recent months, holding at levels that suggest further job gains and lower employment, which may help to spur a turnaround in wages growth and therefore consumer spending,” Oster said.
“Indeed, we saw some tentative signs of higher wages in the survey, although that does appear to be weighing on the confidence of some firms as well.”
The November data included an extra survey periodically provided by NAB, asking businesses to specify key areas of concern.
And while national wage growth remains at record lows, Aussie companies cited higher wage costs as the main factor affecting business confidence.
Across industries, the construction sector remained the standout performer and was the only sector which didn’t decline in November.
However, retail remains subdued and dipped back into negative territory on a three-month moving average basis.
“The construction industry continues to see the benefits of a large residential property pipeline, infrastructure spending, and an apparent lift in non-residential construction activity,” Oster said.
In contrast, “subdued conditions in retail have been a major concern for some time now, and that was manifested in a very disappointing outcome for household consumption in the third quarter National Accounts.”
“We may see a bit of a rebound in Q4, but retailers do not appear to be seeing it.”
By state, business conditions declined across all mainland states in November.
The biggest fall was in NSW which fell by 13 points, but that offset an equally large increase in the previous month.
Oster concluded that when smoothed out for monthly volatility, the November results don’t change NAB’s current outlook for the economy or interest rates.
We remain cautiously optimistic that Australia will see temporarily above trend economic growth in coming quarters,” Oster said.
“Support from business investment and infrastructure construction should be enough to prompt the RBA to consider a gradual removal of emergency policy stimulus.”
“We maintain our expectation for the first RBA hike to come in the second half of next year, but only if the labour market and wages improve further.”
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