If there was one overarching message from yesterday’s surprisingly upbeat June business survey from the National Australia Bank it was this:
Enjoy the return to the good times, because conditions could very well turn down again later this year and into 2010.
That’s not me saying that, it’s the NAB as it attempted to dose any excessive optimism the reader might take from the details of the June business confidence and conditions survey.
Last week it was consumer confidence hitting a 19 month high, yesterday it was business confidence up sharply for a second month in a row, but business conditions rose strongly as well for the first time since before the crunch exploded with the Lehman Brothers collapse last September.
The NAB survey gave a very different message to that from the downbeat ANZ ads jobs survey and the labour force figures last week.
In fact business confidence is now positive for the first time since December 2007, when the collapse of the Centro Property and Retail Trusts sparked a selling wave on the market and confirmed the impact of the credit crunch on highly indebted companies here.
But there’s a major caveat for this renewed and continuing burst of optimism: it’s temporary in the opinion of the NAB and won’t last,
But the NAB said "Trading and profitability back to levels not seen since the collapse in global activity in late 2008 while labour shedding was significantly slower.
"Key drivers of the jump in activity include better performances in manufacturing, construction, wholesaling and finance, suggesting government stimulus continues to temporarily boost growth."
The NAB said that forward orders jumped very sharply (especially in retail and cars). But capacity utilisation was unchanged as stocks fell.
That’s a sign of the impermanence of the improvement. Companies are running down stocks to satisfy the improvement in demand.
But if demand manages to be extended, that will stimulate companies to rebuild stocks, which will in turn have a longer positive impact.
The NAB said the results of its June survey "suggests domestic demand returned to growth in mid-2009".
Despite this upturn, the NAB is playing it cautious, maintaining its domestic growth forecasts for this year at a 0.50% contraction and 1% growth in 2010.
The bank explained this stance, saying "We see some of the current strength as temporary with activity to continue to decline in H2 and unemployment to rise significantly (to around 8% next year).
"The RBA now on hold – less inclined to cut rates further, but we would not rule out late cycle cuts as unemployment rises (albeit this is no longer our base case). Rate rises not likely till H2 2010," the bank said.
"We see elements of pull forward in the recent data – e.g. via the investment allowance and first home buyers scheme – or stimuli that will not be there in the second half of 2009 – e.g. cash hand outs to consumers and continuing strength in net exports.
"Looking forward it is hard to see the pace of consumption being maintained in the face of less cash handouts, rising unemployment and the damage done to household balance sheets.
"Indeed the chart below (left hand panel) shows how robust consumption has been relative to what might have been expected without Government special measures.
"Equally, while interest rates have no doubt helped, we see the current improvement in construction as very much more tied to the boost to the first home owner’s scheme which is due to be phased out over the next 6 months.
"Nor are we convinced that business investment – post some bring forward from investment allowances – will do anything other than continue to fall significantly.
"Currently the forecasts imply falls of around 20% during 2009.
"That suggests that the second half of 2009 will see negative growth with the turning point either in late 2009 or early 2010," the NAB warned.
On inflation, the NAB survey showed sharply slowing levels of wages growth and lower capacity utilisation.
"In the near term (i.e. the June quarter) core inflation may remain higher than expected – but that largely reflects lags.
"Over the forecast period however we see core inflation falling back to the RBA‘s target by early 2010 and moving sharply lower through the rest of the year.
"Inflation targeting suggests that interest rates should be adjusted according to where inflation is expected to be in 12 months time – both our and the RBA forecasts have inflation at the bottom of the 2-3% target (see chart below) at this horizon and going lower into 2011."
But despite the uncertain future, its much better having some positive news about the economy, unlike many of our trading partners and bigger economies offshore.
