NAB: Things are looking good for Australian business, at least in the short-term

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Australian business confidence and conditions softened in July, according to the latest National Australia Bank monthly business survey, although not by a margin that would warrant any near-term concern surrounding the outlook for the economy.

The survey’s confidence measure fell to +4, down from +5 in June, leaving it just below its long-run average of +6.

Although a slightly disappointing outcome, it was a still a reasonable result with no industry recording a negative reading — indicating pessimists outnumber optimists — in July.

“Business confidence continues to show resilience despite the number of external factors (Brexit, Federal election and more), which had threatened to derail it,” said Alan Oster, chief economist at the NAB. “None of the industries in the survey reported negative business confidence in July, although half of them did report lower confidence levels than in June.”

Source: NAB

Helping to explain the resilient performance in the confidence measure, the survey’s conditions index also held above its long-run average, coming in at +8 in July.

Although below the +10 level seen in June, it remains well above its +5 historic average.

It was also broad-based in nature, with conditions remaining positive in all states and territories bar Western Australia.

Source: NAB

“The resilience of business confidence appears to stem largely from the fact that firms are still experiencing very elevated levels of business conditions,” said Oster.

That fact was reinforced by the survey’s measures on trading and profitability which held firmly in positive territory.

The trading subindex came in at +16, down marginally on the +17 level of June, while the separate profitability measure printed at +7, down from +12 but still a robust level nonetheless.

The table below, supplied by the NAB, reveals the internal movements within the July survey, comparing the results to those seen in May and June.

Of note, the employment subindex held at +4 — an encouraging sign for employment growth in the months ahead — while forward orders, stocks and exports all remained firmly in positive territory.

Along with the forward orders measure, Oster believes that the survey’s other leading indicators point to “a solid near-term outlook”.

“Forward orders eased a little, but have been positive for 8 of the past 9 months,” he said. “(While the) measure of capacity utilisation partially recovered from last month’s drop, showing a positive trend and supporting the index of capital expenditure.”

“The outcome still suggesting that the near-term outlook for the non-mining economy is a good one, which is helping prop up demand for labour, albeit primarily in the major eastern states,” he added.

Source: NAB

Though Oster remains confident in the near-term outlook for the economy, he believes that “longer term risks are becoming increasingly apparent, particularly going into 2018 as resource exports start to level off and dwelling construction turns negative”.

On the back of these perceived downside risks, the NAB has altered its forecasts for domestic interest rates, predicting that the Reserve Bank of Australia will now cut interest rates to 1% by August next year.

“Both global and domestic disinflationary pressures are expected to keep CPI inflation below the target band for an extended period, while structural shifts in the economy and modest economic growth will leave the unemployment rate under pressure,” says Oster.

“To stabilise the unemployment rate (at around 5½%) we expect the RBA will feel the need to provide further medium term support through two more 25bp cuts in May and August 2017 (to a new low of 1%).

“And thereafter raises the prospect of the RBA thinking about the use of non-conventional monetary policy measures,” he added.

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