NAB BUSINESS SURVEY: Australian companies haven't had it this good since before the GFC

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Australian businesses can look forward to more growth in the near term according to the March edition of National Australia Bank (NAB’s) monthly business survey.

Following a fall in February, NAB’s barometer of business conditions came storming back in March with a reading of +14 – the highest level since the global financial crisis.

Source: National Australia Bank

February’s drop was still part of a broader trend of improving conditions in 2017, coming after a surge in January with a reading of +14. The long run average for the business conditions survey is +5.

Although business conditions continued to track positively, NAB’s business confidence reading strangely diverged in March – dropping to +6 from a +7 reading in February. A confidence reading of +6 is still historically high.

NAB’s chief economist Alan Oster said that this month’s improvement came as a bit of a surprise, given notable improvements in Queensland business conditions despite the disruption of Cyclone Debbie.

“One possibility is that ‘Debbie’ is having the unexpected effect of overstating conditions in March given that the cyclone coincided with a lower response rate from firms in Northern Queensland,” Oster said.

“Even so, conditions have improved almost across the board to levels that suggest a strong economy in the near-term. That includes WA, which has been looking better of late and suggests the worst of the mining downturn may be behind us.”

A breakdown of the report, below, shows that gains were driven by activity in the trading (sales) sector, which roared ahead in March while business profitability also showed solid improvement:

National Australia Bank

With trading conditions up by 10 points to +22 and profitability up 3 points to +13, Oster was also positive about employment, which remained steady from February with at +5.

The employment reading suggests that NAB’s survey is slightly at odds with official employment statistics from the ABS.

“We are encouraged by the trend seen in employment conditions as it tells us that the economy should be creating enough jobs to bring down the unemployment rate, assuming the participation rate remains steady. That said, the ABS Labour Force Survey appears to be saying otherwise,” Oster said.

Across industries, the NAB survey showed that most industries reported solid trading conditions in March. Consistent with past surveys, the household services and finance, property & business sectors reported the strongest conditions. A breakdown by industry is shown in the chart below:

National Australia Bank

Despite the relative strength of the top two sectors, the latest survey shows other sectors on the rise which augers well for the broader economy.

“The mining industry has been particularly impressive, having lagged well behind in recent years to now be one of the better performers in terms of business conditions, off the back of higher commodity prices and an improved global demand outlook,” Oster said.

Despite an uptick in key industries, continuing weakness in the retail sector remains a concern. Oster said that the poor reading for retail meant that NAB had downgraded its forecast for improved consumption to help drive inflation.

Looking ahead, the leading indicators in the March survey were relatively positive. Forward orders jumped to +4, up from +2 in the first two months of the year. Capacity utilisation also increased which was consistent with NAB’s recording of increased capital expenditure.

Oster said that “forward orders suggest positive near-term prospects for the economy, and even though business confidence has been relatively muted relative to business conditions, reads on business investment from the Survey have managed to strengthen”.

The prevailing theme of the March report is that current conditions provide a sound platform for near-term growth in calendar year 2017. NAB has forecast growth to accelerate in the second half of this year.

Looking longer term, the risks of subdued growth still remain.

“There is still cause to be cautious about the longer-term outlook, particularly as other growth drivers, including LNG exports, commodity prices and housing construction, begin to fade. Meanwhile, the RBA has emphasised its financial stability concerns, which are expected to keep them on hold for the foreseeable future,” Oster said.

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