After all the moaning and groaning from various parts of business (large and small) over Christmas and the New Year, it was a surprise to see that the National Australia Bank’s first business survey of the year has revealed a sharp improvement in business conditions.
In fact the survey, released yesterday, revealed the improvement had seen business conditions jump to a two and a half year high. So much for the moans and groans.
On top of that, the survey also showed that business confidence was all but unchanged on the levels of late last year at plus 6 – which the NAB said was around trend level.
"Confidence has remained surprisingly elevated following the post-election jump, and could potentially remain at these levels for longer than previously thought given that the conditions index has begun to respond.
"Confidence appears relatively even across industries and the mainland states (unlike conditions)," the NAB said in its latest report.
The NAB now reckons that with the improvement and the higher than forecast CPI for the December quarter, the next rate cut has been pushed out to the end of the year from the bank’s previous forecast.
And if conditions continue to edge higher in the next few months, it is possible that rate cuts will be off the agenda completely. HSBC yesterday repeated their earlier forecast that rate cuts from the RBA are finished.
And despite the continuing negative tone from early December 31 reporting companies (with the exception of JB Hi Fi which really surprised on the upside yesterday), the NAB said there had been a sharp recovery in sales and profits, especially in sectors such as wholesale, transport and services.
The NAB said monthly business-conditions index rose to plus-four in December from minus-three in November, signalling a possible turning point for the economy.
The trading conditions sub index jumped to plus-12 from plus-2, supported by record-low interest rates and house prices, and the big fall in the Australian dollar last year that helped exporters.
The NAB said the employment index did better, but still implied a flat job market. But employment is a lagging indicator, so if the improvement is sustained, there could be an upturn in hiring mid year or into the third quarter.
Business conditions – Surprising jump in conditions
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Source:NAB
The NAB however warned that "soft forward indicators question the sustainability of the lift in conditions".
"Most industries recorded improved conditions for December – especially transport, wholesale and the services industries more generally – but, manufacturing and construction were both notable exceptions.
"The sustainability of the jump may be questionable given subdued forward orders, a run down in stocks (although this may be involuntary), and still low capacity utilisation.
"Employment conditions remain soft ( 4 index points). Clearly the January reading (post seasonality) will give a better read on the growth momentum.
"Price inflation still moderate with margins under pressure as AUD increases input costs. But better near term business conditions and the CPI spike delays for next RBA cut from May to late 2014.
"Our wholesale leading indicator suggests much weaker underlying conditions and suggests below trend growth continuing into the first quarter of 2014. Against that the improving trend in business conditions suggest a more optimistic outlook – implying underlying demand growth and GDP growth (6-monthly annualised) of around 3% in Q4, above our forecast," the bank forecast.
The survey showed that Queensland was the only state not to record a noticeable improvement in business conditions in December (up 1 point to -4 index points), which could be partly attributable to recent drought conditions as well as prevailing headwinds to the retail sector.
"Queensland was the worst performing state in December," according to the NAB. "Conditions in WA rose by 17 points, SA improved by 11 points and conditions in both NSW and Victoria lifted 7 points. Following these changes, WA jumped back into first position in the rankings of current business conditions among the mainland states (up 17 points to 11 index points), having slipped into fourth position last month. Victoria and NSW follow in second and third respectively (6 index points; 4 index points)," the NAB said.
And business confidence was "reasonably positive in all mainland states, despite declines in the month for Victoria (down 2), Queensland and SA (both down 4)," according to the NAB.
"NSW and WA were the only mainland states to record a rise, up a modest 1 index point. Despite the weak business conditions facing Queensland firms, the state is reporting the highest degree of confidence of the mainland states in levels terms (9 index points). Firms are least confident in Victoria (+2), followed by NSW and SA (+6)," the bank said.
Business confidence – Confidence looks to be stabilising
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