Business confidence roars back on the budget

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An uplift in business conditions and confidence is one of the key ingredients necessary for Australia’s economic transition to gain both traction and momentum.

So there is plenty of good news in the release this morning of the NAB’s monthly business survey for May. Both confidence and conditions improved to a print of +7.

Alan Oster, NAB chief economist, said the positive impact came from the “recent Federal Budget and interest rate cut” with confidence “up significantly in May.” That took confidence to “the highest level… since August 2014 and has helped to turn the trend more positive.”

The uptick in confidence naturally also reflects improved conditions Oster said, with the print also at +7, the highest since October 2014. As a result this further cements “the upward trend seen over recent months,” Oster said.

Both confidence and conditions data highlight the divergent nature of the economy at the moment as it transitions.

Business confidence was “significantly higher in retail / wholesale (possibly associated with expectations from the Small Business Package) and finance, business and property services”.

But mining confidence fell heavily to -30.

It’s a similar story for conditions which “vary greatly across industries” with the largest fall in mining.

But the good news is that conditions are most positive in Australia’s giant service sectors. Oster said that while the “‘bellwether’ wholesale industry” remains weak “leading indicators such as forward orders improved, as did capacity utilisation and capex spending.”

After much debate about the economic outlook in the wake of last week’s GDP and capex data this business survey provides some very positive economic news. The NAB’s model suggests stronger growth in the 6 months ahead:

Our model of 6-monthly annualised demand growth, using forward orders as a predictor, has continued to suggest stronger growth than the national accounts, although the gap narrowed in Q1 2015. Nevertheless, applying trend forward orders from May to our model suggests that predicted demand growth will lift a little more in Q2. In contrast, our business conditions model under-predicted GDP growth in Q1. Based on robust business conditions in May, our model implies further improvements in GDP growth for Q2.

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