Australian business conditions just fell sharply from record highs

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NAB’s business survey fell sharply in March from the previous month’s record high, but remains above its long-term average.

The business conditions index fell by 6 points to a reading of +14, reversing gains in the previous two months.

The outlook also dimmed somewhat, as the reading for business confidence fell from 9 to +7. The Australian dollar was little-changed in the wake of the release.

This table shows a summary of the key moves in the major sub-indexes:

Source: NAB

There were declines in trading and profitability in March with sharper falls in the sub-index for employment.

However, “the employment index is still consistent with a solid level of jobs growth – approximately 21,000 per month”, NAB said.

“While this remains below the average monthly employment growth recorded by the ABS over the twelve months to February, it is above the ABS’ current trend estimate of 19,000.”

However, growth in labour costs moderated from the previous month, suggesting that the outlook for wage growth remains muted.

NAB’s chief economist Alan Oster said that despite the monthly falls, the latest survey still paints a broadly positive picture.

“Not only do the above-average business conditions continue to point to robust business activity in Australia, it is also broadly based as conditions were equal to, or above, their historical average in all industries,” Oster said.

“While forward orders and capacity utilisation – important leading indicators – declined this month, on a trend basis they both remain at multiple year highs, a positive sign for the non-mining economy, including employment and investment growth.”

Today’s report follows research by JP Morgan last week, which indicated the synchronised global economic recovery may already be a thing of the past.

By industry, the mining sector was the standout as it recorded the highest reading for both conditions and confidence for the first time since 2012.

NAB attributed the gains to continued strength in commodity prices, although the bank expects prices to fall over the coming months — particularly for iron ore and metallurgical coal.

Source: NAB

“If realised, this would place pressure on mining sector conditions and confidence later this year,” NAB said.

Among the other key themes in the month, NAB said although the sub-index for profitabiliy dipped in March it has been broadly trending upwards since later 2016 — and that bodes well for further gains in company earnings.

The bank said that provides a glimmer of hope for capital investment in Australia, given that companies appear hesitant to use debt for capex so large investment decisions are likely to be based on increased earnings.

On the subject of inflation, NAB said the sub-index for purchase costs has been rising slowly off a low base since 2016.

“However, it would need to keep rising to provide a convincing signal that core CPI inflation is about to move back within the RBA’s target band,” NAB said.

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