The latest NAB business survey shows that conditions in Australia continue to be very solid at +10. Despite this, confidence has slipped back again to just +3 in May.
NAB chief economist Alan Oster said the conditions component was a solid result showing the economy in transition. He said the +10 result is above average “and close to post-GFC highs”. He also said the breakdown of the survey by industry is consistent with the NAB’s theme that there is an ongoing recovery in the non-mining sectors of the economy.
“Services are continuing to lead the way, which now includes distributional services such as retail, while manufacturing has pulled back and mining (and related sectors) still look weak,” Oster said.
That result for confidence is a conundrum given that the breakdown in the survey shows trading conditions lifted from 15 to 20 in May and profitability increased from 9 to 12.
But Oster says that it is a small subset of business respondents dragging down confidence.
“Uncertainty over the upcoming election may have contributed to the result, but since the deterioration was confined to a subset of industries (mainly manufacturing and transport), other factors appear to be at play,” he said.
On balance though “other forward indicators from the Survey are reasonably good, with forward orders remaining in positive territory and spare capacity declining,” Oster said.
“The capital expenditure index improved, as did stocks, while there were moderate signs of a pick-up in inflation – a welcome development given global concerns about deflationary pressures.”
That means the economy is transitioning through the increase in non-mining activity as the NAB has advocated for many months. It’s a view supported by the first quarter’s GDP result and, Oster says, this business survey.
That means “barring a very weak CPI result in late July, positive activity trends are likely to keep the RBA on hold for an extended period,” Oster said.
That doesn’t mean the economy is out of the woods.
While “headwinds from the mining sector remain significant, keeping domestic demand subdued (and) inflation has been uncomfortably low (below the RBA’s target band)”, the accommodative setting for monetary policy remains justified, Oster said.