The latest monthly business survey by NAB shows that Australian business conditions are holding up well at recent record highs.
That’s the good news, because data for August revealed a sharp fall in business confidence, following consistent gains in that sub-index over recent months.
Despite that, overall business conditions ticked higher to +15 from a reading of +14 in July, to currently sit well above their long-term average and at the highest level since early 2008.
The underlying component data revealed some interesting trends which NAB said would be worth monitoring.
Trading and profitability eased back slightly from their July highs, but conditions in those categories remain elevated.
Following consistent jobs growth in recent months, there was a notable pickup in the employment index in August.
There was also some evidence that positive trends in the labour market may be flowing through to higher wages. In what could be good news for Australian consumers, the labour costs index rose to 1.2 in August from 0.7 in July.
However, NAB also highlighted that the retail price index dipped into negative territory after steady falls in recent months.
“We will be watching this trend closely as household consumption is a notable point of difference between our relatively subdued growth outlook and the RBA’s more sanguine forecasts,” NAB said.
The table below shows how each individual survey component fared in August:
The sharp 7 point fall in business confidence means that index is now below its long-run average for the first time since mid-2016.
NAB chief economist Alan Oster said that increasing tensions with North Korea may have had some impact, but for one month of data it was too early to read much into it.
In addition, Oster noted that August marks the first month NAB has added an additional query in the survey, asking what firms see as the most influential factors impacting confidence. The extra question will only be asked on a quarterly basis.
“For those indicating deterioration in confidence, the biggest concerns appear to be customer demand, government policy, as well as cost pressures – both energy and wages,” Oster said.
This chart outlines which factors most affected business confidence:
“While we do not know how the significance of each factor has evolved at this juncture, the results provide an interesting insight into what is at the forefront of business concerns in Australia,” NAB said.
“Interestingly, geopolitical risks did not feature in the top 5 concerns for firms, despite escalating tensions with North Korea – although the missile launch over Japan did not take place until quite late in the month,” the bank added.
More broadly, Oster said that the latest index is reflective of the recent trend in economic data.
Last week’s Q2 GDP report was steady, if not spectacular, driven by solid growth in domestic consumption and government spending with a rebound in net exports.
While the latest survey showed a rise in some inputs such as labour costs which could shift the outlook for inflation, Oster adopted a cautiously optimistic tone in his assessment of the broader economy and the direction of interest rates.
“Improvements in labour market indicators point to further falls in the unemployment rate, helping to mount a case to bring forward RBA rate rises,” he said.
“However, there are few signs of inflation/ wage pressures in the official data as yet, while relatively downbeat consumer confidence is still a point of concern in light of poor retail conditions in the NAB survey – the consumption outlook is key to the economy’s sustained return to trend growth.”