On the eve of the delivery of the 2016-17 federal budget, the National Australia Bank’s monthly business survey for April has again painted an upbeat picture about the level of business activity and confidence in the wider economy.
Belying much of the gloom about corporate profit downgrades, weak revenues (especially in retailing) debt and house prices, the NAB survey revealed that business conditions “strengthened from already elevated levels in April, further cementing the positive narrative on current business activity in recent surveys” to levels not seen for 9 years.
And confidence bounced back to reach levels not see for almost seven years.
The survey showed that business conditions index rose 2 points, to +14 index points, well above the long-run average (of +5) and its highest level since early 2008.
And the NAB said that businesses had shaken off their recent relative gloom and become more confident and as a result confidence is now starting to track conditions with the reading up up 7, to 13 index points, the highest since 2010.
According to Mr Alan Oster, NAB’s Chief economist, “business conditions were quite a bit stronger than we expected. However, that is partly because the level of conditions in Queensland did not deteriorate as much as first thought in the wake of Cyclone Debbie, although it did still fall appreciably.
“Even more encouraging is the fact that solid levels of business conditions have begun to look more uniform across industries and states,” he said.
The NAB survey showed that the further improvement in business conditions during April was primarily driven by transport and retail, but the index is positive for most industries in the Survey.
“The major service industries continue to be a standout in the economy, but when you look at the trend, almost all industries are experiencing positive conditions. Retail is still a concerning exception, but a notable improvement in the month of April was a step in the right direction. We do, however, remain somewhat cautious about the consumption and retail sector outlook given the challenges ahead” said Mr Oster.
Mining industry trends remain positive overall, supported by elevated commodity prices, but conditions did drop back last month. And surprisingly a pick up in employment conditions drove most of the improvement in business conditions this month, while profitability was steady.
The NAB said that a drop in trading conditions (sales) was only partly offsetting (to the overall gain) and it remains the strongest component despite the moderation. According to Mr Oster, “the recent improvement in employment growth reported by the ABS helped reduce the gap that had emerged with NAB’s employment conditions index over a number of months.”
"The further gain in NAB’s measure during April means more catch-up required, and if realised, implies a rate of job creation that would see the unemployment rate push lower, assuming the participation rate remains steady”.
Leading indicators from the Survey were more mixed in April, with the capacity utilisation rate dropping back, consistent with weaker capital expenditure, while forward orders were also slightly softer in the month.
Despite that, Mr Oster said that, “even though some of these indicators were a little softer, they are still generally upbeat. Forward orders are suggesting positive near-term prospects for activity, and if current levels of confidence are sustained, that could also translate into an even better read on capex activity down the road.”
Mr Oster said the NAB will release updated economic forecasts part of its post-Budget commentary.
