Trading conditions for Australian businesses fell to the lowest level seen in 18 months in November, raising further concern about the underlying strength in the economy.
Perhaps the weakness seen in the September quarter GDP report was not an aberration after all.
According to the latest monthly business survey released by the National Australia Bank on Tuesday, the index measuring business conditions — an aggregate of the survey’s trading conditions, profitability and employment subindices — fell to +5 in November, the lowest level seen since May 2015.
While it now sits at its long-run average, suggesting, in isolation, that it’s not a poor result, it’s not the figure, but the trend, that most concerns the NAB.
“While this is not a bad result, the trend is raising concerns about the direction of the non-mining recovery in the near-term,” said Alan Oster, chief economist at the NAB.
“We are becoming increasingly concerned about the underlying momentum in the economy as evidence mounts that the non-mining economy is losing steam.
“The downward trend in business conditions and signs of weakness in the Q3 National Accounts, beyond one-off influences such as poor weather, lend further support to this view.”
Although Oster, like the majority of economists, expects economic growth to rebound in the December quarter, he says that beyond the near-term, it’s likely that the economy will resume “its relatively subdued growth track, characterised by muted domestic demand”, in 2017.
As shown in this table from the NAB, the decline in the conditions measures was driven by weaker outcomes for profitability and trading conditions. While employment conditions were steady, Oster says this remain an additional area of concern about where the economy is heading.
“Soft outcomes for employment conditions are a concern, and suggest that the labour market is only barely generating enough jobs to keep the unemployment rate steady,” he said.
And, if the lead indicators found within the survey, the weakening trend in business conditions appears unlikely to reverse any time soon.
The measure on forward orders were steady at zero, described as a “soft” outcome by Oster, while capacity utilisation rates, which are relevant to future employment and capital expenditure growth, posted a modest recovery.
“Subdued orders suggest some risk to the near-term outlook, but tighter capacity utilisation is encouraging for longer-term economic prospects,” said Oster.
Perhaps adding to concern, the moderation in the headline conditions index appears to be broad-based with all industries bar mining and construction now on a weakening trend.
Despite the decline in the conditions index, the separate business confidence measure actually increased, rising by a point to +5.
Oster believes this could be in response to positive, and somewhat surprising reaction, to Donald Trump’s victory in the US presidential election, although he says that it’s hard to reconcile the improvement given the trend in operating conditions.
The survey was also conducted between November 21 to 29, meaning it did not capture any response to Australia’s Q3 GDP report, something that revealed the economy contracted at the fastest pace seen since the GFC last quarter.
While the outcomes in the survey do not point to a severe slowdown in economic activity, Oster believes that the results have softened enough to suggest that growth remains sub-trend.
Given an expected slowdown in residential construction and commodity exports in the quarters ahead, Oster, as he has maintained since the middle of this year, believes that the RBA will cut rates further in 2017.
“Both the housing construction cycle and commodity exports are expected to peak in the relative near-term, compounding the challenge to growth further out,” he says.
“Two more 25bp rate cuts are still expected from the RBA next year in response to on-going low inflation and a more subdued growth outlook.”
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