NAB: Australian business is showing surprising resilience

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Australian business confidence levels remained unchanged last month, brushing aside concerns over the health of the global economy – led by China – that rattled financial markets.

That’s the resilient, and frankly surprising, outcome from the National Australia Bank’s (NAB) latest business report for January with the survey’s headline confidence index holding steady at +2 for a second consecutive month.

Although below its long-run average, the NAB suggest that “the Survey suggests there no fundamental change in our view of the Australian economy”.

Alan Oster, chief economist at the NAB, believes that external factors – mirroring the concern in financial markets at present – is weighing on what would otherwise be strong business confidence levels at present.

“Given all the volatility in equity and financial markets, this is yet another relatively good result from the Business Survey. It suggests things remain broadly on track for the non-mining economy,” said Oster following the January report.

“There are competing factors at play here, with reasonably good domestic fundamentals helping to offset what could potentially be a big drag on confidence from global markets”. Estimates from NAB Economics suggest that under normal conditions, domestic fundamentals would suggest a confidence reading that is around 4-5 points higher than current.”


While confidence put in a resilient performance, there were signs of deterioration in the survey’s business conditions index, which fell to +5 from a downwardly-revised +6 reading in December.

As the table from the NAB reveals below, measures on trading, profitability and employment, exports and forward orders all deteriorated during the month. Despite the decline in most of the indices components, the capacity utilisation rate among firms rose by 0.5 percentage points to 80.6%, largely offsetting the decline previously seen in December.


Continuing the trend seen over much of 2015, the conditions index masked vastly divergence performances by location and individual sectors.

“Business conditions have held-up around long-run average levels, however, they have eased notably from the highs of 2015, in large part driven by a sharp deterioration in WA, and to a lesser extent SA,” says Oster. “In contrast, business conditions remain much more elevated in NSW and Victoria, although both of these have eased modestly from their recent highs as well.”

Reflective of the regional performance, continued weakness in the mining sector was largely offset by non-mining sectors, although they too put in a mixed performance compared to the trend seen in the latter pasts of 2015.

“Business conditions in mining have deteriorated to an eye watering -47 points, which is having a clear flow on effect to conditions in the major mining states” said Oster.

Outside of the mining industry, conditions are relatively mixed, although much of the deterioration in January has come from wholesale, possibly reflecting AUD depreciation. Retail has also exhibited some unexpected weakness. In contrast, the transport industry appears to be seeing the benefits of lower oil prices, while the major services industries remain the clear outperformers.

The chart below reveals the divergent performance in operating conditions by sector. Interestingly, while mining sector conditions have not been this bleak since the height of the global financial crisis, all sectors bar transport/utilities and manufacturing saw conditions have registered a deterioration in operating conditions in recent months.


Despite that development, something that is clearly worth watching should the recent trend continue, Oster remains optimistic, suggesting that “fundamental conditions in the non-mining economy remain very resilient”.

“We have not changed our view of the Australian economy,” says Oster.

“While the international risks have tilted to the downside, the central case for the Australian economy remains for a continuing strong recovery across the non-mining economy over the next two years.”