There are some concerning trends emerging for Australian business, and while they’re not, as yet, enough to raise alarm, they will warrant close monitoring in the period ahead.
That’s the slightly ominous warning to come from the National Australia Bank’s October business survey, released on Tuesday, with analysts at the bank suggesting there are now clear signs of a moderation in Australia’s non-mining economic recovery.
According to the NAB, the survey’s business confidence measure fell to +4 in October, down from +6 in September, leaving it below the series long-run average.
That performance was reflected in the separate business conditions index — an aggregate of trading conditions, profitability and employment — which fell to +6 from +8, leaving it at the lowest level seen since May 2015.
The conditions index is still above average, so not a dire reading by any stretch of the imagination, but it’s been weakening for some time now. That suggests to the NAB that Australia’s non-mining recovery could be “running out of steam sooner than previously thought”.
The survey was conducted between October 25 to 31, ending just before financial markets endured a volatile period following news that the FBI had reopened its case into the use of Hillary Clinton’s private email server, something it has now subsequently closed with no further action undertaken.
“Above-average business conditions in the October NAB Monthly Business Survey indicates solid performance in the non-mining economy, however, the emerging downward trend might suggest the recovery is running out of steam sooner than previously thought,” said Alan Oster, chief economist at the NAB.
Both trading and employment conditions deteriorated over the month while the profitability subindex was steady.
“Softer employment conditions are a concern, particularly with the index now threatening to drop back into negative territory. Any further weakening would suggest future employment growth that is inadequate to prevent a deterioration in the unemployment rate,” said Oster.
The NAB said that the divergence between individual sectors narrowed during the month, indicating a more uniform performance across the business sector, although this was as a result of deterioration in conditions for services-based industries, the best performing area for well over a year.
Adding to concern, the survey’s lead indicators — suggesting where activity levels are heading — also weakened substantially.
The measures on forward orders dropped to zero, the first time the index has not been positive since March while capacity utilisation rates, which are relevant to future employment and capital expenditure growth, continued to decline.
“Both of these trends suggest some risk to both the near-term outlook and longer-term economic prospects. Although, with that said, we have continued to be pleasantly surprised by the strength in the survey’s capex indicator,” said Oster.
This table from the NAB breaks down the October survey into more specific detail, looking at the trend in each component over the past two months:
While they are alert but not alarmed to what has been conveyed in recent months, the NAB believes that in conjunction with expected weakness in commodity exports and housing construction — two factors that have helped to power Australian GDP in recent quarters — the deterioration in the survey will see the RBA continue to cut interest rates in the year ahead.
“The recent moderation in some indicators is a concerning trend that warrants close monitoring, but our assessment is that the deterioration to date is not (yet) enough to warrant a significant change in the outlook,” says Oster.
“However, if the recent trends were to continue, it would be unsettling and imply that the non-mining recovery has started to run out of steam earlier than expected.”
Though he remains “reasonably comfortable with the near-term outlook”, he suggests that impetus from housing construction and commodity export growth will fade “which will see the economy slow into 2018”.
The NAB expects two further 25 basis point rate cuts from the RBA next year “in response to ongoing low inflation and a more subdued growth outlook”.
A slim majority of economists in a recent poll from by Bloomberg share the NAB’s view that a further cut in rates is likely.
However, financial markets, along with a growing list of economists, are now adopting the view that the RBA will leave interest rates steady for the foreseeable future.
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