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NAB Survey Maintains Upbeat Outlook

More support for the Reserve Bank’s sit and hold interest rate stance with the July business conditions and confidence survey from the National Australia Bank showing a step up in both measures, thanks to growing activity and confidence in the services sector..

The NAB said yesterday that the July survey had revealed that “The recent strength in business conditions was maintained going into the start of the third quarter.”

But from the comments in the report the recent rise in the value of the Australian dollar doesn’t seem to be a concern for business as yet.

The business conditions index rose 1 point, to +15 index points, which is three times the long-run average (+5). Similarly, the business confidence index rose 4 points in July, to +12 index points. Confidence has been fairly volatile, and “while not as lofty as business conditions, the index is still double its long-run average,” the bank pointed out in commentary.

NAB’s Chief economist, Alan Oster said in yesterday’s report; “The strong run shown by the business sector continued in the July, with both business conditions and confidence seeing an improvement. Business confidence has gradually been chasing business conditions higher for some time, and has likely seen some additional support this year from an improving global environment as well, although there are still some notable risks”.

The bank said the there was, however, a :enewed divergence across industries in the month as the improvement was driven primarily by professional services, while retail and wholesale softened considerably – again highlighting competitive pressures in retail and the difficulties facing households.

“Every time we think the retail sector might be closing the gap with the more upbeat parts of the economy, it seems to suffer a setback. Retail conditions have generally improved since the lows of late last year, but the trend appears to be turning down again, with retail once again the worst performing industry in the Survey” said Mr Oster.

The NAB said major service industries meanwhile are still generally leading the way, although most industries outside of retail and mining are performing well.

But some leading indicators in the Survey were a little less upbeat, with forward orders softening slightly and capacity utilisation rates unchanged. Profitability though was the only component of business conditions to improve in the quarter, while employment conditions were unchanged and trading/sales moderated slightly – but remains at very elevated levels.

According to Mr Oster, “The persistent strength in employment conditions has made us a little more optimistic about the near-term outlook for the labour market. That said, there are still longer-term challenges to domestic demand, which will have implications for the labour market, while the ABS underemployment rate is also suggesting that there is still a fair degree of slack in the labour market”.

“We remain apprehensive about how the disconnect between the business and consumer sectors will be resolved – especially in light of sluggish retail conditions in July. Additionally, the previously emphasised hurdles to growth – elevated underemployment, household debt and peaks in LNG exports and housing construction – remain firmly in place. These factors will weigh on the longer-term economic outlook, following a re-acceleration of growth in coming quarters from the temporary disruptions to activity seen earlier in the year.

Given the risks to the outlook, only tentative signs of moderation in the housing market, and a reluctance to see the AUD strengthen further, the RBA should be content with keeping interest rates on hold for an extended period.

That said, the recent strength in employment growth and business conditions does give some reason for optimism, and if maintained could signal a change in the balance of risks on the horizon”.

The bank will release its updated economic forecasts later today. They will take into account the small changes by the Reserve Bank in its third Statement of Monetary Policy for the year last Friday.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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