'Risk of a pull-back': Australian business conditions continued to decline in July

(Photo by Chris Jackson / Getty Images)
  • NAB’s latest business survey showed conditions fell again in July, continuing a recent downtrend since April.
  • NAB said the indicators for employment and forward orders were the two key themes in this month’s survey.
  • The sub-index for employment bodes well for Australia’s labour market, but a decline in forward orders suggests businesses are cautious about the outlook.

Australian business sentiment fell again last month, continuing a recent downtrend that started in April.

NAB’s monthly business survey showed the measure for Australian business conditions fell by 2 points to a reading of +12.

Business confidence edged higher by +1 to a reading of +7, although confidence in Sydney and Melbourne remains subdued.

The sub-indexes for forward orders — a key leading indicator for future business conditions — also declined in July, a development which NAB chief economist Alan Oster said warrants further attention.

However, there were positive signs for the labour market in the latest survey.

“There was a welcome rebound in the employment index this month after the declines in each of the previous two months,” said NAB chief economist Alan Oster.

“Our mapping of this measure to the official employment statistics suggests that employment will grow at a stronger rate than the working-age population over the second half of 2018, which should see the unemployment rate gradually decline.”

Source: NAB

NAB cited the employment indicator and forward orders as the two key themes of the month.

When mapped against ABS labour market data on a six-month lead, NAB said its employment index has shown a tight relationship with future jobs growth.

The bank said the index is currently pointing to monthly jobs growth of around 23,000 over the next six months.

Source: NAB

“Assuming a constant participation rate and steady population growth, this is enough to reduce the unemployment rate by around 0.1% a month,” NAB said.

Such a result would bring the unemployment rate back to around 5% by the end of this year — well below the RBA’s latest forecasts released on Friday.

NAB also said the forward orders sub-index warrants further attention following sharp declines in recent months.

“While forward orders remain around average (which still implies growth in the sector), the declines over recent months suggest there is some risk of a pull-back in business activity that warrants close watching over coming months,” NAB said.

Source: NAB

Among the major sub-indexes, the measures for trading and profitability both declined in July.

By industry, confidence remains highest in the mining and construction industries.

The construction industry also had a sharp increase in business conditions in July, offsetting falls in most other sectors.

And despite three straight months of solid data, “the retail sector remains clearly the weakest, declining again in the month as the retail conditions index fall to 0pts,” Oster said.

Looking at the states, NAB said business confidence and NSW and Victoria was again the weakest — both states recording a reading of +4 — which suggests some doubts around the outlook by companies in those states.

Confidence is highest in South Australia, while business conditions remain the most favourable in Tasmania (+19), Queensland (+17) and Victoria (+16).

Overall, Oster said the latest survey was broadly in line with NAB’s outlook for the domestic economy in the second half of the year.

“The business sector looks relatively healthy, and we expect to see enough employment growth to see a gradual reduction in spare capacity which should in time see a rise in wage growth, and a more general lift in inflation,” Oster said.

“Though we will be closely watching trends in the forward indicators which may be signalling some slowdown in the business sector.”

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