Operating conditions for Australian businesses improved dramatically in December, according to the National Australia’s Bank’s highly-respected business confidence survey, pointing to the likelihood of stronger economic conditions in the period ahead.
The survey’s business conditions index jumped by 5 points to +11 in December, well above its long-run average of +5, suggesting that conditions haven’t been this good since the middle of 2016.
However, it wasn’t all good news, suggesting the champagne should be left on ice for the moment.
Casting doubt as to whether it’s the start of a longer lasting trend, Alan Oster, NAB’s chief economist, said that the improvement was narrow in nature, driven entirely by higher readings for trading conditions and profitability, masking continued softness in hiring.
“The jump was completely driven by higher trading conditions and profitability, while the employment index was unchanged at relatively subdued levels,” said Oster.
It’s the ongoing weakness in employment growth, among others issues, that has Oster unwilling to read too much into the result, noting that the labour market is still not generating enough jobs to bring the unemployment rate down from its elevated level.
The movements in the survey’s various components can be seen in the table below, supplied by the NAB.
Adding to the case for caution towards the result, Oster said that forward indicators within the survey diverged sharply, painting a mixed picture on the outlook for business conditions.
“The near-term outlook improved marginally in this month’s survey, with the forward orders index jumping above its long-run average level,” he said. “However, capacity utilisation rate, which are relevant to future employment and capital expenditure, eased back.
Oster said that the outcome for forward orders suggests good near-term prospects for activity, but the drop in capacity utilisation warrants monitoring, “especially as it points to a continuation of the downward trend seen over the second half of 2016”.
That’s a slightly concerning outcome given soft labour market conditions (which feed into future household consumption) and higher non-mining business investment are seen as two pillars to power Australian economic growth in the years ahead.
Oster also said there were some unsettling signs in the performance reported by individual sectors, noting that retail is now the weakest industry in the survey “which is concerning given the importance of consumption to the outlook”.
Given it’s also one of the largest employers in the country, you can see why the NAB is reluctant to read too much into the result, particularly as the improvement in conditions was not mirrored by business confidence which held steady over the same period.
“The headline results from the survey indicate some upside risk to the outlook, but the mixed results below the surface suggest a degree of caution is warranted,” Oster said.
“Importantly, we are not seeing any real signs of a convincing recovery in non-mining investment in the survey, which is crucial to both near-term and longer-term growth prospects.”
Oster says that while some “bounce-back” from the weather affected Q3 GDP contraction “can be expected”, a return to a more subdued growth track thereafter “still seem likely” as the positive effects from the housing construction cycle, commodity exports and higher commodity prices washes out.
He retains the view that the RBA will continue to cut interest rates in 2017 “in response to ongoing low inflation and a more subdued growth outlook”.