Australian businesses continued to report strong operating conditions during May, defying weakness in the nation’s household sector evident in last week’s Australian Q1 GDP report.
But while conditions remained elevated, there was a noticeable pullback in business confidence, suggesting that the boom times currently being enjoyed across the sector may not last.
According to the National Australia Bank’s (NAB) May business survey, operating conditions remained near the highest levels seen since the global financial crisis in May.
The survey’s conditions index — a measure on trading, profitability and employment — fell one point to +12 during the month, a strong outcome that left it sitting well above its long-run average of +5 points.
“The business sector is looking quite upbeat, maintaining the apparent disconnect with a rather melancholy household sector,” said Alan Oster, chief economist at the NAB.
“It is good to see that the strength has been quite broad-based, and even at the state level we have seen some significant improvements in Western Australia, which signals that the worst of the mining sector drag is probably behind us.”
While a strong outcome, the survey found that the improvement in the latter was driven by stronger commodity prices, which have subsequently weakened further in recent weeks.
This table from the NAB shows how individual components in the May survey fared:
By component, the NAB said a moderation in the measures on profitability and employment conditions drove the modest decline in May, while by sector, weaker conditions were reported across the construction and finance/property/business services industries.
While a slightly weaker outcome, both the headline index, and its components, still remain elevated compared to historic norms.
“Profitability has remained elevated for some time now, backed up by solid profit outcomes in the first quarter National Accounts,” says Oster.
“Similarly, the current level of employment conditions is consistent with the recent improvements in ABS employment growth.
“That has helped to close the previous departure between the NAB and ABS measures of employment, while the NAB index suggests that we can expect more solid employment growth to continue over coming months.”
Adding to the impressive result, and indicating that business conditions are strengthening across the broader business sector, the NAB said that all industries reported positive business conditions in May. It’s only the second time that has been seen since 2010.
Conditions are strong, and the improvement is broad-based.
That’s a good outcome all things considered, particularly with the survey’s lead indicators on activity levels also moving in the right direction.
“Other leading indicators were generally encouraging, with the capacity utilisation rate rising, despite some pull-back in capital expenditure, while forward orders were steady in positive territory for the month,” the NAB said.
However, casting some doubt as to whether or not the recent improvement in business conditions will be sustained, the survey’s confidence index fell heavily, dropping six points to +7.
“The wedge between confidence and conditions is likely a reflection of the heightened uncertainty around the outlook, although the degree to which this reflects global versus domestic factors is difficult to gauge,” the NAB said.
While a noticeable drop, it’s worthwhile pointing out the confidence index still remains above its long-run average of +6. The NAB also said that while confidence levels vary across individual industries, every sector still recorded a positive reading in May.
While slightly weaker report card on conditions and confidence than what was reported in April, Oster says that Australian businesses remain upbeat, a view in stark contrast to that offered by the nation’s household sector in recent months.
In his opinion, how the disparity between the two groups resolves itself will be critical to the outlook for economic growth.
“Optimists might point to solid levels of employment conditions as providing the much needed catalyst to lift the household sector out of its current funk. However, significant structural headwinds still pose a hurdle that will prove difficult to overcome, keeping wages growth subdued and consumers cautious with their spending,” Oster says.
Although Oster is forecasting that economic growth will accelerate in the second half of the year, he remains cautious, like others such as Westpac’s chief economist Bill Evans, on the longer-term outlook for the economy.
“The longer-term outlook could be less sanguine in our view as important growth drivers (such as) LNG exports, commodity prices and housing construction begin to fade,” he says.
Despite that view, Oster says that the RBA is unlikely to take action to address those concerns, suggesting that the RBA’s emphasis on financial stability concerns are expected to keep rates on hold for the foreseeable future.