NAB: An RBA rate cut will further cement Australia's non-mining recovery

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If the RBA was looking for something outside of inflation to cut interest rates in May, it has not been provided by the NAB’s Australian business survey for April, with conditions and confidence holding on to most of the hefty gains previously registered in March.

The NAB believes it continues to point to a “very favourable business environment for Australian firms” providing an “upbeat near-term outlook for the Australian economy”.

The survey’s business conditions index came in at +9, down from +12 in March, although it remains well above the survey’s long-run average of +5.

“Even though business conditions eased this month, they have remained well above average levels for the past year,” said Alan Oster, chief economist at the NAB.

“With consistently good results like these from our survey, it is difficult not to have a degree of confidence in the near-term outlook.”

According to the NAB, measures on trading (sales) and profitability remained “quite positive” while the employment gauge held onto the gains achieved in March “suggesting ongoing resilience in the labour market”.

Forward orders also improved, rising to +2 from -1 in the prior survey, suggesting that trading conditions may improve even further in the months ahead.

Counteracting that improvement, the survey’s measure on capacity utilisation fell from 82.1% to 81.4%, a disappointing outcome given it is perceived by many to be a forward indicator on likely business investment, one of the few missing pieces in Australia’s economic growth puzzle.

“The trend remains very much a positive one, which is starting to encourage firms to invest, and is supporting demand for labour,” said Oster. “Indeed, firms indicated that they increased capital expenditure in this month’s survey.”

Here’s the breakdown of the NAB survey by individual component.

Continuing the trend seen in recent surveys, services industries continued to outperform, although Oster noted that “other sectors are looking relatively upbeat as the benefits of a lower oil prices and earlier AUD depreciation continue to flow through”.

“We continue to look for signs that the recovery is broadening, and while evidence of that was a little less compelling this month, solid results for manufacturing and transport, as well as a bounce-back in retail, are all reassuring.”

Although not as strong as the business conditions index, business confidence held onto most of the gains seen in March, falling 1 point to to +5, marginally below the survey’s long-run average.

Despite the modest decline, Oster suggests it was still a reasonable result given uncertainties around the global economy and the upcoming federal budget and election.

In unison with past results, the NAB believes the March survey indicates that “the non-mining recover appears to be on track”, suggesting that “there is no need to fundamentally change our view of the near-term economic outlook for Australia”.

Despite this view, the NAB is the only one of Australia’s big four banks to forecast a rate cut from the RBA in May, suggesting that the low March quarter inflation print provides scope to “further cement the non-mining recovery with an additional cut to the cash rate at tomorrow’s meeting”.

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