Yesterday Australian treasury secretary John Fraser said he could sense an improvement in Australia’s business conditions, telling a Senate hearing that “things have been picking up somewhat. It’s been happening for the last couple of months or so”.
That sentiment is confirmed in the latest edition of the NAB’s long-running Quarterly Business Survey. With a larger number of respondents the 25-year-old quarterly survey offers a deeper dive into the Australia business economy and shows a strong improvement in business conditions.
For the third quarter Australian business reported a hike in current conditions to 11, against 5 last quarter. Expectations about conditions in 3 months time also jumped sharply to 11 (from 5) with expectations of conditions in 12 months time jumping to 25 (from 19).
That means current business conditions are sitting at their highest level since 2008. It also means that current conditions are 10 full points above the long run average of +1.
Confidence fell to 0 from 4 in the second quarter. But the NAB said this was likely a reflection of the political situation when the survey was taken.
Summarising the survey the NAB said:
The September quarter NAB Business Survey confirms the trend improvement current condition in the non-mining economy, while the outlook is also looking notably better. In contrast, confidence softened considerably although this is largely a reflection of the timing of the survey – prior to the Liberal Party leadership resolution, and at a time when emerging market concerns were particularly high.
Breaking the survey down, you can see the feedback that drove John Fraser to reflect improved business conditions in the economy at yesterday’s Senate hearing are clear.
Not only are conditions up and expectations about the future up, but trading improved from 11 to 18, profitability jumped from 4 to 11, forward orders rose from 1 to 5 and exports rose from 1 to 3. Even employment showed tentative signs of lifting with an improvement from -1 to +1.
The NAB makes it clear that the improvement is in large part a result of the RBA’s policy settings on interest rates and the level of the Aussie dollar which are the key drivers of the improvement.
“Lower interest rates and AUD depreciation appear to be having the desired effects, although this varies by industry,” the bank said.
On the much anticipated, and needed increase in non-mining business investment, the NAB says things are looking up.
“A lift in capacity utilisation and capex plans for the next 12 months is encouraging.” But they add that business is still looking for higher rates of return than perhaps the economy can deliver at present noting that “firms continue to suggest they require high ‘hurdle rates’ of return before committing to investment,” they say.
Overall this is a strong survey, which points to an improvement in domestic demand, especially in the non-mining sector. It is also a survey the NAB says points to a pick up in Australia’s GDP.
This survey is incredibly important for the debate about RBA rate cuts and a potential cut on Melbourne Cup day less than a fortnight away. The survey, and Fraser’s comments, are likely to be reflected in the RBA’s own liaison work in the economy. Taken together with the sanguine economic outlook reflected in the RBA board minutes release this week suggest the chances of a cut are receding.
Likewise there is a risk now that the RBA will upgrade, rather than downgrade – as many calling for a rate cut expect – the economic outlook in its quarterly Statement on Monetary Policy released after the next Board meeting.