Australian business conditions continue to go from strength to strength, hitting a fresh multi-year peak in the latest National Australia Bank business confidence survey for July.
And employment conditions continue to point to strong hiring levels in the months ahead, an important factor given its implications for wage growth, household spending, inflation and the outlook for domestic interest rates.
It’s all looking very promising for the Australian economy in the second half of 2017.
The survey’s measure on business conditions rose 1 point to +15, leaving it at the highest level since early 2008. Underlining just how strong conditions are at present, the index currently sits three times higher that the series’ long-run average of +5.
Alan Oster, chief economist at the National Australia Bank (NAB), said that the improvement was driven by stronger profitability levels, overriding a modest decline in trading conditions and steady employment reading.
“Profitability was the only component of business conditions to improve in the month, while employment conditions were unchanged and trading/sales moderated slightly, but remains at very elevated levels,” he said.
The table below shows how each individual survey component fared in July.
Like the conditions index, the survey’s confidence measure also rose, jumping 4 points to +12, leaving it close to the highest level since early 2010. It currently sits at double its historic average.
“Business confidence has been chasing business conditions higher, and has likely seen some additional support from an improving global environment as well, although there are still some notable risks,” the NAB said.
“Confidence levels are currently positive for all industries — even in mining and retail where conditions have not been as robust.”
However, despite continued strength in the July report, Oster said that conditions varied significantly across individual sectors.
“There was a renewed divergence across industries in the month as the improvement was driven primarily by professional services, while retail and wholesale softened considerably, again highlighting competitive pressures in retail and the difficulties facing households,” Oster said.
“Retail conditions have generally improved since the lows of late last year, but the trend appears to be turning down again, with retail once again the worst performing industry in the survey.”
That remains an area of concern, not only because it is the second-largest employer in Australia behind healthcare, but also because of the entrance of foreign retailers such as Amazon to the Australian marketplace, something that could exacerbate this weakness further.
Outside of retail, the NAB said that major service industries continued to outperform.
Across the broader Australian economy, the NAB said the performance was a little more uniform in nature with conditions in all locations remaining in positive territory in trend terms with the exception of Western Australia.
“New South Wales has returned to the top spot for the mainland states, with trend conditions sitting at +16 index points,” the NAB said.
“The other states are following close behind however, with Queensland and South Australia each sitting on +15 index points and Victoria on +14.
“Despite a notable improvement in the past year or so, Western Australia is still a notable underperformer with trend conditions at just 0 index points.”
So a strong performance, if not a little mixed by location and sector.
And the good news didn’t stop there.
While the employment subindex held steady at +7 for a second consecutive month, Oster said the result made him a “little more optimistic about the near-term outlook for the labour market”.
“Employment conditions were again steady in the month at levels that indicate a healthy rate of job creation in the economy,” he said.
“That is consistent with strong outcomes for employment growth seen in the ABS labour force survey and points to a continuation of solid jobs growth over coming months.”
Oster said the employment reading — currently sitting well above historic norms — points to an annual job creation rate of around 240,000, or around 20,000 per month, in the near-term, something that he says will be sufficient to see the unemployment rate push lower.
“In trend terms, mining and construction have the best employment conditions, at +18 and +11 index points respectively,” said Oster. “No industries are showing negative employment conditions (trend), but manufacturing, wholesale and retail are all fairly subdued.”
However, despite the optimistic outlook for hiring, there were few signs that improved labour market conditions were translating to higher wage growth, at least not yet.
Labour costs growth — a measure of wages paid by employers — eased to a quarterly rate of 0.6%, down from 1.1% in June.
“Labour cost inflation had been subdued and this month’s moderation — if maintained — unwinds the improvement seen since mid 2016,” says Oster. “Labour cost pressures were particularly weak in mining, at -0.7%, despite improvements in employee demand, but were also subdued in wholesale at 0.3%.”
Developments in wage pressures will be watched closely by the Reserve Bank of Australia (RBA) given it is a crucial component in helping to stir household spending and inflationary pressures.
The survey’s forward indicators were also a little more subdued than June with forward orders softening slightly and capacity utilisation rates unchanged.
Again, like wage pressures, this is an area that will need to be watched closely given its implications for activity levels across the business sector in the period ahead.
Reflecting that uncertainty, Oster again painted a cautious picture on the outlook for the Australian economy.
“We remain apprehensive about how the disconnect between the business and consumer sectors will be resolved, especially in light of sluggish retail conditions in July,” he said.
“Additionally, the previously emphasised hurdles to growth — elevated underemployment, household debt and peaks in LNG exports and housing construction — remain firmly in place.
“These factors will weigh on the longer-term economic outlook, following a reacceleration of growth in coming quarters from the temporary disruptions to activity seen earlier in the year.”
Oster says that given the risks to the outlook, coupled with tentative signs of moderation in the housing market and a reluctance to see the AUD strengthen further, the RBA should be content with keeping interest rates on hold for an extended period.
He says that recent strength in employment growth and business conditions, if sustained, would be the likely catalysts to see him alter that view.
The ABS will release Australia’s June quarter wage price index (WPI) on August 16. That will be followed by Australia’s July jobs report one day later on August 17.
Both carry the potential to shift the discussion on the outlook for Australian interest rates.