Australian business conditions haven't been this good since before the GFC

(Photo by Mark Metcalfe/Getty Images)

Australian business conditions and confidence soared in January, according to the latest business survey from the National Australia Bank, suggesting the domestic economy is strengthening — rapidly — following the shock quarterly GDP contraction reported in the September quarter last year.

And there’s signs that Australia’s spluttering labour market is also back on track, hinting that the lull in hiring seen late last year is unlikely be repeated in early 2017.

Australian business, on face value, is making a stonking comeback, led by an enormous improvement in operating conditions.

The NAB’s conditions index — an average of the survey’s sales, profitability and employment measures — surged by 6 points to +16, leaving it at the highest level since October 2007.

Not only a post-GFC high, but well above the series long-run average of +5.

A bullish sign for the economy if there ever was one.

Source: NAB

“Within business conditions, rising trading conditions (sales) contributed to the outcome yet again… (while) profits were unchanged at solid levels,” said Alan Oster, chief economist at the NAB.

And with sales and profitability remaining at elevated levels, that appears to have flowed through to the outlook for hiring, says Oster.

“The employment index has now hit its highest level since 2011, having previously been stubbornly muted for some time,” he said.

“This month’s jump in employment conditions bodes well for the generally underperforming labour market, and suggests stronger job creation than we have seen from the ABS in their labour force survey lately.”

After a sharp slowing in employment growth in the second half of 2016, led by some of the nation’s largest and services-orientated states, this is undeniably good news.

The positive outcome for all three measures is shown in the table below from the NAB.

Source: NAB

By specific industry, Oster said the outcomes “were quite varied ” during the month.

“A sharp deterioration in wholesale conditions was to be expected given that last month’s spike came as a surprise. However, it was encouraging to see improvements in some other key industries, which included mining and retail, both of which are no longer negative,” he said.

Source: NAB

The improvement in the mining sector is not all that surprising given the enormous price gains in Australia’s key commodity exports in recent months.

Despite the pickup in retail operating conditions — an important outcome given the outlook for household spending and employment growth — Oster expressed some caution towards the result, suggesting that the trend for retail is still “very soft” which suggests the outlook for consumption “remains cloudy”.

By region, Oster said much of the strength was confined to New South Wales, with most other mainland states putting in a mixed performance.

“NSW business conditions were up 7 points in the month, to a level of +23 index points — the highest of the mainland states by a clear margin,” he said.

“In contrast, both Victoria and SA fell, although the former is still seeing very elevated conditions.”

Currently, Western Australia is the only state with negative business conditions, indicating that the improvement in conditions — while not unilateral in scale — is broadening across the country.

The strength in New South Wales may partially reflect the states booming housing market, with prices rising strongly in 2016 and again in early 2017.

Looking ahead, the survey’s lead indicators on business conditions — new orders and capacity utilisation — came in mixed, creating some doubt as to whether the positive developments in recent months will be sustained in the period ahead.

“Forward orders are pointing to modestly positive near term prospects for activity, although perhaps not enough to sustain this month’s spike in business conditions,” Oster said. “Nonetheless, the lift in capacity utilisation rates is a relief in terms of the outlook for business investment and the labour market.”

So forward orders are still above average levels and capacity utilisation is stating to tick higher — an outcome that suggests there’s room for cautious optimism.

And, reflecting the recent improvement in business conditions, the survey’s confidence measure also spiked, jumping to +10, an increase of 4 points on December.

Confidence now sits at the highest level since February 2014, nearly three years ago, and reflects the exuberance expressed by financial markets since early November that the global economy is improving.

However, despite the positive report card on conditions and confidence, Oster thinks it’s too early to get excited about a prolonged recovery in the months ahead.

“A confluence of seasonal factors suggests it is unwise to get too carried away with the result just yet, especially as some key industries remain fairly weak,’ said Oster.

“As for business confidence, we suspect the enthusiasm in financial markets has helped a lot. If sustained, confidence at these levels could see firms revise up their capital expenditure and hiring plans.”

In particular, Oster said the timing of the Chinese New Year may have played a role in the strong January result, noting the conditions measure actually fell considerably when not adjusting for seasonality.

While he expects the survey points to the likelihood of near-term strengthening in the economy — reducing the probability of Australia entering a technical recession for the first time in a quarter of a century — he remains cautious on the longer-term outlook for growth.

“The economy is expected to bounce-back from the negative growth seen in Q3 as the temporary factors that weighed on the economy wash out. The survey confirms the strength of that recovery, but its longevity may still be up for question” he says, adding the NAB “continues to have concerns for the longer-term growth picture, as the contribution of LNG exports, temporarily higher commodity prices and the residential construction boom fade, keeping pressure on the labour market”.

However, there’s signs those concerns may be starting to ebb with Oster saying that it economic forecasts — which includes expectations for the RBA’s cash rate — “are currently under review”.

The NAB is just one of a handful of forecasters who believe the RBA will continue to reduce rates in 2017, calling for the cash rate to sit at just 1% by the end of the year.

The NAB will release its revised forecasts on Wednesday.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at