Australian business conditions steadied in June but the outlook remains mixed

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  • NAB’s monthly survey showed business conditions edged higher while confidence fell, after both indexes fell sharply in May .
  • The report found that business cash flows remain at above-average levels and the mining sector is having another “mini-boom”.
  • NAB chief economist Alan Oster said report is indicitivae of robust growth in the economy, although inflationary forces remain weak.

Conditions on the ground for Australian businesses remained steady in June, following a sharp decline in May.

NAB’s monthly business survey showed that business conditions edged higher to a reading of +15 (up from +14).

The report’s other headline measure — the business confidence index — fell by 1 point to +6 — reflective of a downward trend in recent months after posting a reading of +11 in April.

Source: NAB

The June measure for business conditions got a lift from a rebounding in the sub-indexes for trading and profitability, offset by the employment index which fell for the second straight month.

Leading indicators were mixed, as capacity utilisation edged higher but forward orders also fell for the second straight month.

Source: NAB

NAB’s chief economist Alan Oster said that despite its recent decline, the sub-index for employment remains above its long-term average.

“Our mapping of this measure to the official employment statistics suggests that employment will continue to grow at a slightly stronger rate than the population over 2018, which should see the unemployment rate decline and a gradual pickup in wages growth,” Oster said.

By industry, the mining and construction sectors continue to stand out, amid higher commodity prices and a steady pipeline of new infrastructure projects.

The retail sector continues to lag other industries, with June data showing a decline in quarterly retail prices compared to the previous two months.

South Australia and Tasmania reported the best business conditions by state, although all states remain above the long-term average.

In terms of the outlook, both New South Wales and Victoria continue to lag behind other states in the reading for business confidence — a trend that was evident last month and possible reflective of ongoing house-price declines in Sydney and Melbourne.

Key themes

One of the two key themes highlighted by NAB this month was business cash flow — cited as a “broader concept of business health, capturing the ability of businesses to collect revenue in a timely manner and meet outflows as they are due”.

NAB said business cash flow has risen over the past year and remains at a high level, despite having eased back slightly in recent surveys.

Source: NAB

Cash flow is strongest in professional services sectors such as finance and transport & storage providers.

Retail lags while cash flow in the construction sector has declined since the end of last year, which NAB said was a possible consequence of the housing downturn.

The second key theme was the recent strength of the mining industry, which sits comfortably ahead of most other industries in the readings for both conditions and confidence.

“Commodity prices have risen, export demand continues to grow, while it is likely that cost pressures seen at the height of the boom have abated and productivity has risen as projects ramp up to capacity,” NAB said.

With the last of the major LNG projects now due for completion over the next year or so, NAB said investment in the sector may revert back to more normal levels.

In line with the increased activity, NAB said there had been a re-emergence of employment cost pressures in the sector, “with the labour cost index rising to levels last seen close to the peak of the mining boom”.

Despite that, there were no key changes stemming from today’s report about the outlook for the broader economy.

“The survey continues to suggest relatively robust growth in the economy but also suggests that broader inflationary pressures remain weak with slow rates of both purchase price and final products price inflation,” Oster said.

Despite easing a little in recent months, NAB readings for trading and profitability are positive indicators for the growth outlook.

“This growth will be necessary to reduce the amount of spare capacity in the economy, which should in time see a rise in prices and wages growth, which we consider key to the path of monetary policy over the next few years,” Oster said.

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