Australian business conditions just bounced back but retailers are still feeling the pinch

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NAB’s monthly business survey showed business conditions returned to record highs in April.

However, while the mining and finance sectors continue to strengthen, business conditions in retail turned negative for the first time this year.

The sub-index for business conditions rose by 6 points to a reading of +21, fully reversing a sharp fall in the previous month.

Adjusted for monthly volatility, the trend data is representative of broader strength among Australian companies — with Aussie business conditions routinely coming in at or near record highs since the middle of last year.

The outlook also improved in April, as business confidence rose to a reading of +10 — up from +8 in the previous month.

Here are the key moves in each of the major sub-indexes — with last month’s increase driven by a rebound in trading and profitability:

Source: NAB

By sector, gains were led once again by the mining sector and financial services industries. Conditions increased in all industries in April except for manufacturing and retail.

The drop in retail conditions follows the Ai Group’s services PMI index last week, which showed a decline in the hospitality and retail sectors — a potentially worrying sign for the household spending outlook.

But from a business standpoint, NAB’s chief economist Alan Oster said weaker conditions in retail aren’t posing a contagion threat yet.

“On a more positive note, concerns that retail weakness might be spreading to retail & personal services have been alleviated by a significant improvement in conditions in that industry over the last two months, particularly in April,” he said.

Oster added that the employment figures in the latest business survey are cause for optimism in terms of the outlook for Australia’s labour market.

Recent employment data from the ABS indicates that Australia’s record run of jobs growth is starting to slow, but the employment sub-index in today’s NAB survey hit its highest level on record in trend terms.

“The improvement in the employment index was particularly welcome in the light of the ABS reporting a slowdown in jobs growth in recent months,” Oster said.

“Historically, the NAB Survey does a good job at looking through short-term cycles in the ABS data and so we think the labour market continues to improve.”

Source: NAB

Oster also pointed to the NAB survey’s sub-index for capacity utilisation, which edged higher in April but has been broadly trending upwards since 2013.

He said rising capacity utilisation has historically been a good leading indicator for unemployment, which points to a future reduction in the current unemployment rate of 5.5%.

NAB maintains the view that declining unemployment should eventually put upward pressure on wages, which will prompt the RBA to make a move on interest rates.

“Our current call is for the first move by the RBA to be late this year,” Oster said.

“But as hard evidence of a firming in wages growth is yet to appear in the data, and unemployment for the moment stuck at around 5.5%, the risk is that any action by the RBA will be delayed into 2019.”

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