'Conditions have materially deteriorated': Sluggish Australian economic growth may be here to stay

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  • Operating conditions for Australian businesses deteriorated February. Confidence levels also fell to the lowest level since January 2019.
  • Views on profitability and trading conditions weakened, but the employment subindex held steady.
  • Capacity utilisation and forward orders both declined, adding to downside risks for business investment and hiring.
  • Australia’s economy slowed sharply in the second half of last year. The NAB says the latest survey suggests “there has been little improvement” this year.

Business operating conditions in Australia have materially deteriorated in early 2019, posing downside risks for investment, hiring and broader economic growth in the period ahead, according to the National Australia Bank’s (NAB) Business Confidence Survey for February.

The NAB’s conditions index fell three points to +4 during the month, dragged lower by weakening views towards profitability and trading conditions. The separate business confidence index also slipped by two points to +2, leaving it at the lowest level since January 2016.


“Conditions declined in February to below average levels with profitability and trading now below average,” said Alan Oster, Chief Economist at the NAB.

“While monthly movements in conditions have been hard to interpret in the early part of the year, this survey is based on a larger sample and surveyed well after the January period and suggests that conditions have materially deteriorated.”

While conditions were judged to have deteriorated again last month, largely reversing the small bounce seen in January, that did not impact hiring intentions among firms in the latest survey with the employment subindex holding steady at +5.


“The employment index has remained resilient to date, likely reflecting that labour demand decisions typically lag economic activity,” Oster said, adding the current level in the survey is consistent with average employment growth of around 19,000 per month, enough to keep gradual downward pressure on Australia’s unemployment rate should labour market participation rates remain steady.

“Leading indicators of the labour market will be important over the next few months as we assess the lags between output and employment,” Oster said.


Last month, the Reserve Bank of Australia (RBA) indicated that the risks for the next move in Australia’s cash rate were now “more evenly balanced” than what they were last year. The bank also nominated that a sustained increase in Australia’s unemployment rate was one outcome that could warrant a further cut in official interest rates.

While the employment subindex suggests that a lift in unemployment is unlikely in the near-term, Oster said the survey’s leading indicators point to downside risks for hiring in the months ahead.

“Forward orders declined in the month to below average levels,” Oster said. Capacity utilisation also declined further and is now below average, and is at or below average across most industries.”

Oster said the weakening in these indicators — providing an early guide as to how conditions may evolve in the period ahead — points to “ongoing weakness in business conditions”

“Confidence remains below average, forward orders are negative and capacity utilisation is trending lower. This may have important implications for both future investment and employment decisions of business,” he said.

That’s important given the RBA is banking on stronger business investment and solid labour market conditions to help support broader Australian economic growth this year and next.

Across the country, operating conditions in Tasmania remained the highest in the country, followed by Victoria and New South Wales, Australia’s largest state economies.

“Conditions remain most favourable in the east, though confidence is weakest in New South Wales and Victoria, suggesting there might be some further pullback there,” Oster said.

“In contrast South Australia and Western Australia saw some improvement, though are starting from a low base.”


By sector, while a small majority of firms across most sectors are still reporting favourable operating conditions, the NAB said that proportion is getting smaller.

And in the case of retailers, conditions remained bleak.

“While the decline in conditions has been broad-based across industries, retail remains the standout,” Oster said.

“It has now reported negative conditions for five months and with the outlook for the consumer remaining weak, we see little improvement on the horizon.”

As the second-largest employer in Australia behind the healthcare sector, not only does the weakness in retail conditions add to downside risks for employment growth, it also sends a troubling signal on the strength of household spending in early 2019, especially given how weak it was the in the second half of last year.

And with the largest parts of the Australian economy stuttering, Oster said recent trends suggest little has improved for the broader economy this year.

“Following the release of Australia’s Q4 GDP report — which showed growth has materially slowed in the private sector — the business survey suggests that there has been little improvement in the first two quarters of the first quarter in 2019,” he said.

“This suggests some further growing risks to our outlook for business investment in 2019.”

The NAB, like a growing number banks, is now forecasting two 25 basis point rate cuts from the RBA this year. Financial markets are fully priced for one 25 basis point decrease this year, with the growing risk of a second.

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