The first major survey of Australian business conditions for 2008 reveals an economy still performing strongly, but now looking at a slowing rate of growth over the next year as conditions turn.
The National Australia Bank's business conditions survey for December shows that businesses became the least confident in more than two years in December because of fears that earnings will be hit by rising costs, slowing US growth and the global credit crunch.
The bank said the sentiment index slipped 1 point from November to 5. That's still positive (a reading higher than zero shows companies expecting their industry to improve outnumber those predicting a deterioration) but it is a continuation of a slow turning in sentiment in recent months.
The bank said "most sectors were flat to marginally down – offset by stronger mining confidence. Confidence is now back at long run trend and significantly weaker than conditions.
"Overall, the Survey is consistent with domestic demand growing around 4% early in Q4 – but reinforces recent survey results which suggest that both conditions and domestic demand may have peaked."
Nab's Chief Economist, Alan Oster, said in commentary accompanying the survey that "There are signs that the impact of the US slowdown and financial market instability are spreading. The survey does point to slower Australian growth going forward, though not a sharp slump.''
Weakening confidence and signs of slowing global growth has caused the Nab to cut its forecast for growth in 2008 to 3% from 3.2% and a 4% estimate for 2007.
The weakening in business confidence mirrors that among consumers with the monthly survey from Westpac and the Melbourne Institute showing confidence slumped by the most in 14 months in January after banks raised home-loan rates, petrol prices rose and the share market fell heavily.
The Nab's so-called business conditions index rose 2 points to 17. (A reading above zero indicates more companies say earnings, sales and hiring were good last month than those reporting they were poor.) But this was boosted by better expectations among the mining industry and wholesalers. Trading conditions unchanged at +21, profitability up 5 to +19, while employment down 2 to +10.
Capacity utilisation down 0.7 percentage points to 83.0% – with the trend now also slowing. New orders down 2 to +5 – with the trend also now past its recent peak;
Confidence was down a further 1 to +5, with Wages growth moderating a touch in December, and the annual growth rate slowing to 5.2%;
And there's further evidence of wider margins in retailing moves with retail inflation up sharply to 2.7%.
The key finding of the December survey is that business conditions remained very strong at the end of 2007. Confidence, on the other hand, continued to erode – and no doubt will have eroded further in January given the falls in global equity markets (the January survey is currently in the field, with the results to be published on 12 February).
The December survey results also provide further evidence that, while business conditions are strong, they have passed their peak and are expected to continue to ease. As well as the lower levels of confidence, forward orders are also pointing to the peak having passed.
There is also further support for this in the recent movements in the components of the trend business conditions index. Thus, while profitability increases drove business conditions up a bit in seasonally adjusted terms in the month of December, in trend terms both trading and profitability have eroded over the last few months more than offsetting still strong trend acceleration in employment (consistent with the latter’s lagging relationship to actual sales).
That said, the strength of employment and sales/profitability continues to see the business sector operating at very high levels of capacity utilisation – see chart below left hand panel. Also, as has been the case for some time, there is little evidence of excess stocks and the underlying strength of the economy is very much domestic orientated – with export conditions again disappointing with a reading of zero index points.
Overall, our preferred measure for relating the readings from the Survey to economic activity – based on the rate of change in survey business conditions – suggests that domestic demand at the end of the December quarter was still travelling at a robust 4% but slowing.
An expectation that activity will continue to slow would be consistent with the impact of higher interest rates, a still strong currency and continuing problems in global financial markets (which as well as increasing funding costs and the cost of capital is now also having wealth effects via lower equity markets and raising doubts about global growth prospects).
As noted above, there are very different trends emerging for confidence vis a vis actual business outcomes.
Turning first to business confidence, the following chart highlights that lower confidence in the interest sensitive sectors, of retail, wholesale and manufacturing, has been evident from mid 2007 – that is subsequent to recent RBA tightening. In more recent times it is clear that confidence in the construction sector – again interest sensitive – has moved significantly lower.
Also, not unexpectedly, confidence in the finance property and business services has moved significantly lower – consistent wi
