Australian business remains upbeat despite recent financial turmoil

Photo: Mike Hewitt/Getty Images

Australian business confidence fell modestly last month, largely pushing aside concerns over the global growth outlook expressed by financial markets.

According to the latest NAB business survey, the headline confidence index fell 2 points to +3 in December, signalling that optimists continue to outnumber pessimists despite recent ructions in financial markets.

Like the headline confidence measure, the surveys separate business conditions index also put in a resilient performance, falling 3 points to +7. Despite the modest decline, the index still remains above its long-run average of +5.

The table below, supplied by the NAB, reveals the internal movements within the December survey.

Measures on trading and profitability – despite small declines – remained elevated compared to their historic norms while the surveys foward orders gauge – a lead indicator on future levels of demand – rose by 2 points to +4.

Despite a decline in the survey’s employment guage – down 2 points to 0 – the result was resilient, and encouraging, nonetheless.

“While recent big declines in oil and equity markets highlight potential risks to the global outlook, relatively positive business conditions appear to have, so far, acted to reassure business sentiment,” said Alan Oster, chief economist at the NAB following the release of the December survey.

“This outcome suggests there are no real signs (beyond normal monthly volatility) that there is a fundamental weakening in the non-mining recovery.”

Fitting with the theme seen over the second half of last year, the elevated business conditions reading was largely due to continued strength across the nation’s vast services sector.

As the chart below reveals, supplied by the NAB, most services industries continue to enjoy strong operating conditions, although there was a noticeable weakening in those industries exposed to the residential property market.

“There was a particularly large contraction in business conditions for retail and construction, both of which have been a notable source of improvement in the survey over recent years,” said Oster.

“Falling mining investment is still having an effect on construction, but we are also likely witnessing some loss of momentum in these industries as residential property markets start to cool”.

Given recent weakening in other economic indicators related to the residential property market, along with the need for household consumption to remain firm this year as mining sector investment tapers off, developments in this sector are likely to be monitored closely by policymakers, including the RBA, in the months ahead.

Despite signs that conditions across services industries are deteriorating slightly, the NAB believe that Australia’s economic transition will gather momentum in the year ahead, buoyed by further declines in the Australian dollar and lower petrol prices.

The outlook for the Australian economy is essentially unchanged despite global risks and we continue to anticipate further recovery across the non-mining economy. The AUD (now expected to depreciate to USD66c by mid-2016) will continue to act as a pressure valve, the tilt towards services activity will support employment, and lower petrol prices will support the cash flow position of most households and businesses. Resource export volumes will remain strong, although the associated income and government revenue will of course be challenged by low commodity prices. Overall, real GDP is forecast to pick up gradually to 2.7% in 2016 and 3.0% in 2017. The unemployment rate track has been revised given the lower starting point, and is now expected to ease to 5.6% by end-16 and 5.5% by end-17.

Given the positive outlook for the economy, the NAB suggests that it’s likely that the RBA will leave interest rates unchanged in the year ahead.

“Unless financial market volatility translates into substantive negative real economic outcomes offshore, NAB expects the RBA will remain on the sidelines and observe developments, while continuing to focus on solid momentum in non-mining economic activity,” says Oster.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.