If you thought that financial market turmoil and political uncertainty would be enough to dent Australian business confidence, think again.
Despite everything that was thrown at them over the past few weeks — be it Brexit, the potential for a downgrade to Australia’s credit rating or the closeness of the federal election — confidence surged in June.
According to the latest National Australia Bank (NAB) business survey, the subindex measuring business confidence rose to +6 in June, some three points above the levels seen in May.
The NAB points out that the survey was undertaken at the height of recent financial market volatility, making the result even more remarkable.
“This suggests that firms are looking through external uncertainties, choosing to focus on the positives they see in their own business, at least for the time being,” said Alan Oster, chief economist at the NAB. “It is encouraging to see firm’s sentiment is holding up, particularly as we head into a period of political uncertainty”.
Adding to the bullish confidence reading, and perhaps underlining why it improved, firms indicated that operating conditions improved with the separate conditions subindex rising two points to +12, well above its long-run average of +5.
“Firms continued to report very high business conditions, pointing to another strong quarter for the non-mining economy,” said Oster.
“The business conditions index rose from an already elevated level, hitting +12 index points in June, which is consistent with the post-GFC highs for the series.
“Encouragingly, the improvement was driven in large part by a lift in employment conditions, which are back above long-run average levels. Profitability also improved in June, while trading conditions were unchanged at very high levels,” he added.
The table below, supplied by the NAB, shows the internal movements seen in the June survey. In overall terms, it paints a bullish picture for the economy, both now and in the future.
“These results generally tell us we can be confident about the near-term outlook”, suggests Oster.
“Orders were flat-to-higher for most industries in the month, which fits into the narrative of a broadening non-mining recovery.
“The capital expenditure index improved again in the month, recovering the ground lost in previous months to be well above the long-run average. At +9 index points, the capex indicator looks to be more upbeat on investment than reads from the ABS Capex survey,” he added.
All things considered, it’s a remarkable outcome given heightened levels of uncertainty seen during the survey period.
Given the strength of the result, Oster believes “the RBA should be reasonably comfortable with the present state of economic activity, even in the wake of recent events that cloud the outlook.”
However, while the survey suggests there’s little need to stimulate the domestic economy at present, Oster believes, like others, that “the view on inflation is arguably more important at this juncture”.
“The survey is not suggesting any meaningful turnaround in near-term inflation pressures,” he says, noting that “retail prices trends turned negative in June”.
“These trends justify the highly accommodative setting for monetary policy, but while the August RBA meeting is likely to be ‘live’, current information suggest rates will remain on hold.”
In a recent survey conducted by Bloomberg, the NAB was the only group to not forecast a rate cut from the RBA in August.
Given the benign inflation outlook, most expect that the bank will cut official interest rates following the release of the June quarter CPI report on July 27, mirroring the move seen in May following the release of the March quarter report in late April.