The National Australia Bank’s quarterly business survey shows a broad improvement in confidence, expectations and conditions, with signs of it being a bit more firmly based than disclosed in the monthly surveys.
The bank’s previous monthly surveys have shown business confidence and conditions rising strong and yesterday the bank confirmed that, but went a little further.
The NAB pointed out that third quarter business confidence "jumped sharply (up 20 points) to levels last seen in early 2002.
"Business conditions also significantly better (up 14 points) in Q3 with better outcomes across trading and profits (back to Q1 2008 levels) and to a lesser extent employment (Q3 2008)."
We have known this from the monthlies, but NAB said the quarterly survey had pointed to a significant jump in both near and long term business expectations.
"In the near term (next 3 months), business expectations are for further improvement, while expectations for the coming 12 months have returned to around long-run average readings," the NAB said.
We have seen the likes of Woolworths, Coles, JB Hi-Fi and Harvey Norman report decent rises in sales growth on a comparable store basis (meaning sales grew over the 12 months based on the same number of stores).
But the stronger dollar is emerging as a big issue for many companies with offshore operations, or facing import competition, while it will continue to benefit retailers and importer/wholesalers.
Hastie Group, the medium sized air conditioning engineering group, yesterday issued a warning that the stronger dollar could clip returns from its growing offshore business.
In fact the NAB in its quarterly survey, forecast the dollar hitting 97 US cents by year’s end and hitting parity during 2010. It saw the dollar helping cut inflation to 2% next year.
"As a broad statement, profits and trading conditions in Q3 are similar to those reported in Q1 2008, while employment is approaching levels indicating little further reduction in employment (be it via heads or hours),” the NAB said in its detailed commentary.
"What the recent Monthly Surveys highlight – that is not so evident in the Quarterly Survey – is that confidence, having run very much ahead of outcomes, is starting to ease back, with a commensurate weakening in profits and sales (especially in discretionary spending sectors).
"Against that, in the most recent Monthly Surveys the labour market has shown surprising strength.
"Nevertheless, from a longer run perspective, the Quarterly readings reiterate the point that demand growth continues at relatively strong rates in Q3 – indeed longer run relationships suggest annualized growth over the last 6 months somewhere between 3-4%"
The NAB said that in marked contrast for the confidence levels, business investment intentions "remain very subdued – consistent with little real increase in capital spending over the next year.
"While business has become much more confident, that has not translated into plans to increase capital spending.
"This divergence has very important growth implications and puts a real note of caution against overly optimistic growth expectations.
"Thus, while business capital plans have improved from the "Armageddon" levels of early 2009, they still imply little to no growth in investment over the next 6-12 months."
The bank said forward orders also improved significantly – "consistent with continuing strong demand in Q3.
"Hours worked stabilised in Q3, but are still down around 2% on this time last year.
"Availability of suitable labour tightened marginally (26 to 32 points) but is still at historically very low levels (64 points this time last year)."
"Capacity utilisation edged higher to 80.5% (up 0.4 points) but is still relatively low.
"Wage pressures remain subdued as purchase costs & economy wide price pressures slow sharply.
"Retail inflation, is finally showing signs of slower growth (reflecting the higher AUD)."
The NAB didn’t shift its Australian GDP forecasts from a half a per cent rise this year and 2% in 2010.
"That implies a relatively flat second half 2009 as policy stimulus peak passes and a return to near trend growth (around 3%) during 2010.
"Unemployment peak unchanged at 6.7% in mid 2010."
The NAB said the Reserve Bank will "continue increasing rates in 25 point moves (albeit a 50 point move is not impossible) to 4.5% by early (March) 2010, before pausing.
"Rates to reach 4.75% by late 2010, & 5.5% in 2011."
The survey also picked up some other interesting trends:
"There has been a radical shift in interest rate expectations with 87% of businesses now expecting rate rises (28% in June).
"The mean expectation was for rate rises of 83 points over the next twelve months.
"Not surprisingly, business judged the Government’s actions as having had a positive impact on their plans (net balance +12) with significantly larger impacts on construction (net balance +28 – with even larger impacts on residential and infrastructure), retail (net balance +8 – especially cars), and wholesale (net balance +8).
"The only sectors to report a net negative result were mining (net balance -12) and the utilities.
"The recent sharp appreciation of the AUD has come as a surprise to businesses who were expecting 83c USD
