Australian business confidence plummets to a two-year low

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  • NAB’s latest business survey showed Australian business conditions rebounded in August.
  • However, confidence around the outlook fell to a reading of +4 – the lowest level since August 2016.
  • Despite that, NAB’s chief economist Alan Oster said key leading indicators are relatively positive for the months ahead.

The latest NAB business survey showed operating conditions rebounded in August. However, the outlook among Australian companies is becoming increasingly pessimistic.

The measure for business conditions rose by 3 points to a reading of +15, after falling the previous month.

But business confidence fell by 3 points to +4, leaving the measure at its lowest reading since August 2016:

The latest drop also saw the measure for business confidence fall below its long-term average.

However, NAB chief economist Alan Oster said the key leading indicators in this month’s report were relatively positive.

“Forward orders rose to above average levels, reversing its decline last month,” Oster said. Capacity utilisation also hedged higher.

“The stabilisation of the forward looking indicators provides some comfort that while business conditions have eased from the levels seen in early 2018, the outlook remains positive,” Oster said.

“In combination with a rebound in business conditions this month, this suggests that the business sector has continued to perform strongly as we enter the second half of 2018.”

Gains in the headline reading for business conditions were driven by an improvement in trading and profitability.

The sub-index for labour costs also rose by 0.4 to a reading of 1.3, which Oster said points to jobs growth of around 23,000 per month in the second half of the year.

Combined with a steady participation rate, it “should be enough to see the unemployment rate decline further over the rest of 2018,” Oster said.

By industry, confidence remains highest for mining (+20) and construction (+9). And by state, confidence declined everywhere in August except WA and Queensland.

NAB highlighted non-mining business investment as the two key themes of this month’s report.

Business investment is expected to stabilise, then begin to increase as the effect of the unwinding mining investment boom wanes and growth in the non-mining sector lifts,” NAB said.

Capex levels remain highest in mining, but are still above the long-term average for all industries except retail and transport:

On the subject of company profits, NAB said profits have been lower in Q3 so far compared to Q2, “but the uptick in August suggests that profits have stabilised at a relatively high level”.

NAB highlighted that profit levels are an important indicator of future investment decisions.

And the current levels, combined with steady rates of capacity utilisation, mean Australian companies are well placed to pull the trigger on capex “where suitable projects arise”.

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