AUSTRALIAN BUSINESS CONDITIONS PLUNGE

Business conditions fell sharply in February, unwinding half of Australia’s post-election gains.

NAB’s monthly business conditions index fell back to zero from +5, which was the near-three-year high recorded in January and the long-run average of the series.

Trading, employment conditions and profitability sub-indices all deteriorated during the month. Trading conditions in the manufacturing sector were particularly weak, falling 15 points after a sharp rise last month.

Wholesale activity was also weak, at -10 points in February, which NAB said could indicate more weak business conditions ahead.

From NAB’s report today:

Despite the poor conditions, businesses remained hopeful in February, with the business confidence index falling only 2 points to +7.

Confidence remained positive across all states, further widening a yawning gap between sentiment and reality. From NAB:

Confidence has managed to remain resilient despite volatility (and presently weak) business conditions. Soft forward orders and headwinds from weak business investment and a deteriorating labour market may make it difficult for firms to maintain their optimistic outlook – particularly in light of growing global uncertainties.

There are, however, a handful of bright spots emerging, particularly in the construction sector. Confidence is now positive for most industries, including wholesale (a bellwether industry), although transport & utilities and mining are both negative – significant given the importance of mining to the Australian economy.

NAB is expecting the RBA to cut rates again late this calendar year, while unemployment rises to 6.5% and stays “higher for longer”.

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