There was another solid reading from the National Australia Bank’s monthly survey of business conditions which held steady at +10 in May and still above the long-run average.
But its business confidence index slipped two points to +3, perhaps reflecting uncertainty over the July 2 general election.
And the conditions survey revealed that companies reported a notable improvement in sales and profitability last month, highlighting an ongoing recovery in the non-mining sectors of the economy.
“Service industries continue to lead the way, which now includes distributional services such as retail, but mining and construction remain quite weak, which is partly a reflection of the ongoing downturn in spending on resource projects,” NAB chief Economist Alan Oster said yesterday.
“Overall, this outcome suggests that economic activity is holding up reasonably well, with the RBA more focused on the inflation outlook – encouragingly, inflation indicators in the survey picked up a little this month.
“The Q1 National Accounts confirmed the positive trend seen in the NAB Business Survey for non-mining business activity, with a notable contribution to growth coming from the service sectors.
“The story was much the same in May, with firms continuing to point to a favourable business environment, despite a further slip in business confidence.
“Business conditions remained at a very elevated level (unchanged from last month), as a notable improvement in trading conditions (sales) and profitability offset a disappointing moderation in employment demand – consistent with more moderate rates of employment growth in recent months,” Mr Oster said.
The growth in purchase costs rose in May to 0.7% at a quarterly rate, from 0.3%, while final product prices growth quickened slightly to 0.3% from 0.1%.
The survey’s index of sales rose five points to +20, while the measure for profits climbed three points to +12.
“Financial markets have priced in another 0.25% cut by the Reserve Bank by year end, but without a very weak CPI result for Q2 and/or a markedly higher AUD, non-mining activity strength, together with financial stability concerns of even lower rates, are, on balance more likely to keep the RBA on hold," the NAB said.
Evidence in the survey of a broader-based non-mining recovery has been mixed, but most industries did record an improvement in business conditions for May, according to the NAB’s survey.
According to Mr Oster, “The RBA’s cut to interest rates did not help lift business confidence as we had hoped, even as sales activity continues to improve”. He said that, “uncertainty around the upcoming election might be a factor here, but mixed results across industries suggest that other factors are at play”.
Leading indicators from the Survey are looking reasonably good, with forward orders remaining in positive territory and spare capacity declining. “Given the very weak signals on investment intentions coming from elsewhere, we are encouraged to see that the positive trend in capacity utilisation rates has continued”, said Mr Oster.
“Firms are more likely to go out and invest or hire more workers if they see that their spare capacity is shrinking”, according to Mr Oster. Indeed, firms indicated an increase in capital expenditure in this month’s Survey.
"Overall, these survey results give us confidence in our near-term view of the economic outlook, which sees the non-mining recovery remaining on track. With activity indicators staying resilient, the RBA is likely to be more focussed on the inflation outlook – encouragingly, inflation indicators in the Survey picked-up a little this month.
"Consequently, the next “live” RBA meeting is not expected until after the next CPI read in late July. Financial markets have priced in another 25bp cut by November, but without a very weak CPI result for Q2, positive activity trends are likely to keep the RBA on hold,” Mr Oster said.
