Business conditions softened noticeably again in the December quarter under the weight of sagging profitability and ahead of the impact of the January floods in Queensland and northern Victoria, and Cyclone Yasi at the turn of the month and early February.
Business confidence fell back in the December quarter, all but returning to its mid-year softness.
The National Australia Bank business survey for the final quarter of 2010 found business confidence fell four index points to five while business conditions fell three points to two.
A reading above zero indicates optimists outweigh pessimists, so while confidence and conditions have weakened, they haven’t gone negative.
"The survey suggests that optimism about the outlook was on the wane even before the severe floods in December and January," the NAB said.
The survey also showed that business conditions continued drifting down in the December quarter.
The NAB said this was, "consistent with ongoing weakness in domestic demand, reflected in soft forward orders and declining capacity utilisation".
Short and long-term expectations for business conditions weakened in December quarter.
"Short-term expectations for forward orders softened for the fourth successive quarter.
"The monthly results show a sharp flood-related reduction in conditions, and a further deterioration in orders, in January."
The monthly surveys show that conditions improved during the December quarter but fell heavily in January during the worst of the Queensland floods, the NAB said in commentary on the survey.
There was a sharp recovery in business conditions in Western Australia, which regained the mantle of strongest major state, and heavy falls in Victoria and Queensland, the latter being the weakest of the major states.
"The deterioration in Queensland conditions continued throughout the December quarter and plunged severely in January during the worst of the floods," the NAB said.
The rebound in Western Australia though is interesting because it’s where the bulk of the resources boom is concentrated.
It suggests that business conditions will improve as the year goes on and the impact of the floods fades and rebuilding starts.
With the national accounts for the December quarter out next Wednesday, the NAB said that "based on the average forward orders from the monthly survey we estimate that 6-monthly annualised demand growth was around 3% in the December quarter and non-farm GDP at around 2½%.
"The first reading of forward orders for January suggests that demand growth may have slipped to 2¾%. Based on historical relationships, the business conditions index implies that non-farm GDP grew at a 6-monthly annualised rate of 3¼% in the December quarter, somewhat faster than implied by forward orders.
"The January business conditions index, if sustained for the remainder of the March quarter, implies that this rate slowed to around 1¾% in the March quarter."
The news is mixed from the various parts of the survey.
For example, while capacity utilisation fell again and orders remained in negative territory, long-term capital spending plans have held up, indicating the loss of optimism is a short term thing for the moment.
That’s also supported by the survey showing that long-term employment expectations are solid and average hours appear broadly unchanged.
The NAB said the fall in business conditions "was driven by a sharp fall in profitability, although trading and employment conditions also declined.
"Stocks were unchanged in the December quarter but export sales weakened.
"Conditions fell heavily in transport & utilities, agribusiness, business services and finance, offsetting rises in property services, recreation and mining."
But the bank said conditions improved in property services, recreation and mining (before the impact of the floods).
"Conditions were strongest in recreation and mining and were weakest in retail, and agribusiness," the survey showed.
There were heavy falls in confidence in wholesale, property services, manufacturing and agribusiness: wholesale and agribusiness are the least confident sectors.
But business confidence improved sharply in mining, in line with rises in bulk commodity spot prices in October. Mining is now the most positive sector.
New data in this Survey suggest that business capital spending plans over the next 12 months remained unchanged in the December quarter (those figures are out tomorrow).
The NAB said that more firms reported lack of demand as a constraint on profitability for the first time in more than a year.
But cost pressures remain weak, with labour cost pressures and expectations easing, purchase costs edging lower and mild deflation in retail prices.
