NAB: Business confidence is up, the economy is healing and the RBA is unlikely to cut rates

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The release of improved business confidence and conditions for May this morning is a welcome sign that the Australian economy is healing.

But NAB chief economist Alan Oster also highlights that it goes against the grain of what appears to be a “growing difference between more optimistic short-term data and weaker longer-run expectations”.

It’s still a mixed outlook with Oster highlighting that:

The big picture is still one where the domestic economy is struggling to offset the impact of sharply lower mining investment – as again highlighted in the Q1 National accounts. Subsequently there has been some improvement in recent short term data – especially the May NAB survey which suggests business confidence improved post the Budget and rate cuts – as did business activity, capex spending and capacity utilisation.

Against that, capex expectations in the non-mining sector has weakened, business remains reluctant to employ and consumers remain cautious. With future domestic demand still weak, unemployment is expected to rise a touch to around 6.4% by the end 2015 and remain relatively elevated for some time.

That sounds like a forecast which could accompany a forecast of falling rates. But Oster believes the RBA is more likely than not finished with its rate cutting regime.

Based on our forecasts for activity, the labour market and inflation, we see the RBA as finished cutting – albeit they could still cut if our (and their) forecasts are not achieved. We also see the next move in interest rates as up – but not till late 2016 (and with a lower end point for the cash rate of around 3.5%)

Here are the NAB’s forecasts:

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