MALCOLM METER STALLS: Business conditions steady but confidence drops

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They’re a fickle bunch, Australian businesses. That’s the message in the latest NAB business survey for October.

Even though business conditions “were unchanged at an above average +9 points” during the month, confidence went backwards, falling from +5 to +2 during the month. The NAB said business confidence “remains somewhat fickle, despite persistent strength in business conditions.”

That means when it comes to confidence “much of the gain following the Government’s leadership resolution and a paring-back of concerns about emerging markets,” has now been unwound.

That’s despite strong conditions, trading, profitability and employment.

No doubt prime minister Malcolm Turnbull, like RBA governor Glenn Stevens before him, will want to encourage business to let loose its animal spirits.

The question however is: what exactly does it take to give Australian businesses sustainable and enduring confidence? Conditions at +9 are being characterised by the NAB as “solid”, with the bank noting that this both above the long-run average of +5 and post-GFC average of just +2.

That strength in conditions is important because “consistently above-average outcomes (since March) are helping to provide reassurance that the non-mining economic recovery is gaining further traction, although there continues to be a significant dispersion in business conditions across industries.”

That is, mining, manufacturing and wholesale “reported negative conditions” the NAB said while services industries continue to outperform and “a majority of industries improved in the month.”

But the NAB warned that if the dispersion in business conditions across industries is sustained it “could potentially pose a hindrance to the non-mining recovery>” They added however that “for now it most likely reflects varying sensitivity across industries to the lower AUD and interest rates which should diminish over time.”

Perhaps it is the dispersion of strength across industry, each facing their own headwinds, which is constraining confidence which the NAb says at just +2 points is “well below the long run average.”

Trying to get to the heart of what’s holding confidence back, the bank said:

While the Government’s leadership resolution appeared to have a notable (albeit temporary) effect, it is difficult to disentangle this from concerns about growth in emerging markets and financial market volatility which is likely to have influenced confidence with varying degrees of intensity in recent months. The recent drop in forward orders may also have weighed on confidence this month.

Add to this the fact that the fall in confidence was “somewhat broad based” and you get a picture of an economy, or at least a business sector still feeling pressure. Again it was personal and business services which enjoyed the highest confidence. But at +5 each it’s hardly an exciting outlook.

Summing up the outlook for the economy the NAB remains confident that Q3 GDP will boucne back from Q2’s “temporary weakness.” But it also says that:

Business conditions derived from our ‘wholesale leading indicator’ (below), which has previously had a good leading relationship with economic activity, would imply a somewhat weaker business environment than the headline index suggest – although this could reflect margin squeeze from AUD depreciation given the difficulty passing on additional costs to retailers and final consumers.

Perhaps there is all the explanation we need.

The lack of ability to pass on the price increases that flow from a lower Aussie dollar tell us that the Australian economy might be struggling with the economic transition at the moment.

That’s exactly why the RBA has the door ajar to further rate cuts in Australia. Perhaps low inflation is simply emblematic of an economy muddling through. No wonder business confidence keeps pulling back — Australian business will be seeing that at the coalface.

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