Business conditions stabilise but NAB is now ready to say the RBA could cut rates

A general view of a Myer store in Melbourne, Australia. (Photo by Scott Barbour/Getty Images)
  • Australian business conditions rebounded in January, lessening the risk of a pronounced slowdown in hiring and investment in the months ahead.
  • However, there has been a clear loss of momentum for the business sector over recent months, leading the NAB to abandon its call for RBA rate hikes nest year. It says there’s now a greater probability that rates will be cut, not increased.
  • Employment growth looks set to remain reasonable, although there’s few signs that is leading to meaningful wage pressures.
  • Conditions in the retail sector remain dire, providing an ominous warning on the strength of household spending.

Australian business conditions rebounded in January, lessening the risk of a pronounced slowdown in hiring and investment in the months ahead.

However, conditions for the retail sector — the second-largest employer in the country — remained dire.

According to the National Australia Bank’s (NAB) monthly business survey, the conditions index rose 4 points to +7, partially recovering having fallen by the most since the GFC in December.

“Conditions rebounded somewhat after the sharp decline last month,” said Alan Oster, Chief Economist at the NAB.

“We had noted that seasonality and statistical volatility may have driven some of the result but that the trend in conditions had been down.

“The January survey confirms this, and while we don’t think activity in the business sector has crashed, we think that there has been some loss in momentum.”

The conditions index now sits just above the series long-run average. The separate confidence index also rebounded from December although, at +4, it still sits at below-average levels.

However, as seen in the chart below, both the conditions and confidence indexes have fallen quite sharply from the levels seen throughout most of 2018.


The improvement in the conditions index last month was broad-based with trading, profitability and employment lifting from a month earlier.

At +5, the employment subindex, based on historic patterns, growth in employment of 19,000 per month, around the level required to keep unemployment steady without changes in participation rates.

There are few signs that tighter labour market conditions are helping to lift wage or inflationary pressures with the readings in January remaining weak.

“Overall survey measures of prices and inflation remain weak,” Oster said.

“Retail prices growth edged up marginally in the month, but overall final prices growth remained flat.

“On the input side, both input prices and labour costs growth edged lower.”


When looking at the broader trends in the data, Oster said conditions remain the strongest in the eastern mainland states.

“Conditions rose in Queensland, Western Australia and South Australia and were flat in New South Wales and Victoria,” he said.

“In trend terms, conditions remain most favourable in the east across the mainland while Tasmania currently reports the strongest conditions of all states.”

By sector, conditions improved across most industries last month. However, retail was one of the few exceptions.

“Retail business conditions remain weak,” Oster said.

“This follows on from the recently released official retail sales data that showed a decline in December and only small rise in volumes for the quarter as a whole.

“Car sales and household goods continue to show the weakest and falling conditions in our survey — this is consistent with the broader macro story at present.”

It’s also a big concern given the signals it is providing on household spending, the largest part of the economy at over 50%.


Hinting that broader conditions across Australia business sector are unlikely to strengthen meaningfully in the months ahead, new orders and capacity utilisation — regarded as leading indicators for activity in in the future — were mixed in January.

“The forward orders index rose to +2 index points after turning negative last month, but remains around average levels,” Oster said.

“Capacity utilisation declined further to 81.4% and is now approaching long-run average levels.

Oster said capacity utilisation was at or below long-run averages levels across most industries, pointing to lacklustre growth in business investment ahead.

Given the deteriorating backdrop for businesses, even with the small improvement seen in January, the NAB has abandoned its forecasts for RBA rate hikes next year, suggesting that if there is to be a movement in the period ahead, it’s more likely to be down than up.

“Based on the confirmation that conditions have deteriorated further and our current set of forecasts we now see the RBA staying in neutral for the foreseeable future, though think the next move could be down rather than up based on the current trajectory of growth and growing downside risks,” Oster said.

Last week, the RBA acknowledged that the risks for the next movement in Australia’s cash rate are now “evenly balanced”, a departure from the view held throughout most of last year that the next move was likely to be higher.

The RBA also downgraded its GDP growth forecasts out to 2021, pointing to even slower progress in lowering unemployment and boosting wage and inflationary pressures.

Of the seven risks in nominated for those lowered forecasts, six were also to the downside.

After flirting with the idea that the RBA may cut rates this year in December and January, financial markets are now fully priced for a 25 basis point rate cut to be delivered this year, with a small risk that there may be two by the middle of 2020.