The October reading for NAB’s monthly business survey has the business conditions index rising to an all-time high of +21.
That’s a jump of 7 points from September, and marks the highest ever reading since the monthly series began in 1997.
The increase is particularly impressive given that business conditions were already trending strongly, with readings in recent months consistently around three times higher than the long-term average.
Gains in October were driven by a sharp rise in trading and profitability, suggesting that Australian businesses successfully achieved improved margins in October:
The Australian dollar was little-changed in the wake of the release. It rose slightly but remains near a four-month low in morning trade.
NAB chief economist Alan Oster acknowledged the strong result, but adopted a more cautious tone toward the outlook, noting the fall in forward orders in October — seen as a key leading indicator for business sentiment.
“This is an extremely strong result and of itself would suggest a better than expected performance for the economy,” Oster said.
“However, it is unclear just how long conditions can remain at these record levels given that the result was driven by a surprise jump in manufacturing, while some of the leading indicators such as forward orders – which have been giving a more accurate read on the strength of the economy – have actually softened a little in recent months.”
While business confidence held steady in October at +8, it hasn’t matched the consistent gains the reading for business conditions has achieved in recent months.
“Less upbeat readings on business confidence may also be telling, with firms previously indicating that uncertainty around the outlook for their business is holding confidence back,” Oster said.
The reading for employment held steady at +7 in October, which Oster said is representative of the strong conditions in Australia’s labour market.
“NAB’s employment index is also running at a level which suggests further job gains and lower employment, which in turn may help to favourably close the prolonged disconnect between the upbeat business sector, and more cautious household sector,” he said.
Markets will get an update on the widening gab between business conditions and consumer sentiment tomorrow, with the release of Westpac’s monthly consumer confidence data.
While the employment reading held steady, Oster noted that labour costs data in the October business survey remain subdued, falling to 0.7 from 1.0 in September.
And the falls in labour costs were demonstrated most sharply in the mining sector. This table summarises the percentage change in input costs by industry:
In fact, data for October revealed softer conditions across the mining sector in general, with forward orders for mining also dipping sharply (down 29, offsetting a strong increase in the prior month). The index for mining sector employment also dipped by 29 basis points.
And the figures revealed a small glimmer of hope for the retail sector, as prices stayed in positive territory for the second straight month. There was also a small pickup in retail labour costs, which rose by 0.3% in October.
“The subdued conditions in retail have been a major concern for some time now, but are not overly surprising given some of the headwinds that are facing the industry. However, retail conditions did improve a little this month, which was enough to arrest the downward trend we have been seeing since mid-year,” Oster said.
By state, NSW returned to the top position for business conditions, with a 14 point rise leaving the index at +21 points.
South Australia was the only state to report a fall in October, but remains second behind NSW in trend terms with an index reading of +20 points, ahead of Victoria (+19) and Queensland (+21).
Most states are still reporting relatively strong levels of business confidence, although only SA and NSW saw an improvement in October while Queensland maintains the highest reading (+11) in trend terms.
“Overall, the results from the Survey affirm our cautiously optimistic view that Australia may temporarily see above trend rates of economic growth over the coming quarters,” Oster said.
That’s in line with the RBA’s outlook in its Statement on Monetary Policy on Friday, where the central bank maintained its optimistic projections for near-term growth.
Oster said increased infrastructure spending and the prospect of a rise in business investment will help to underpin growth next year, with a tentative forecast for an interest rate rise in the second half of 2018.
“However, there are still significant challenges to the outlook, especially as the economy starts to see less support coming from housing construction and LNG exports.”
“Fortunately, we expect to see offsets from business investment and infrastructure construction, which should be enough for the RBA to slowly remove some of its emergency policy stimulus, albeit not until the second half of next year, and only if the labour market and wages improve further.”