Now December was either a one-off so far as business conditions are concerned, or it saw the start of a new lower trend that should see concern rise about the further direction of Australian economic growth.
While business confidence remained unchanged in December according to the latest NAB survey, conditions turned down noticeably.
In fact, the survey shows that business conditions fell sharply in December and the NAB says that at face value, “the fall over the past 6 months suggests a significant slowing in the momentum of activity in the business sector – especially from the highs seen earlier in the year.”
The bank’s economics team though does say that while caution should be taken when interpreting data around the Christmas/New Year period, this outcome does continue the downward trend in conditions over the second half of 2018.
The results of this survey and another weak inflation result in the December quarter Consumer Price Index later today (Wednesday) will add to the growing belief that the Reserve Bank’s next move in interest rates will be down later this year, not up in late 2020.
The RBA board meets for the first time next Tuesday to decide on monetary policy – Governor Phil Lowe has a major address the next day and the first Statement on Monetary Policy for 2019 will be released on Friday week.
That means the RBA statement from Dr. Lowe after next Tuesday’s meeting and his speech the next day will be informed by the bank’s latest economic forecasts contained in the monetary policy statement.
The monthly NAB survey is one of a limited number of private surveys taken seriously by the RBA so its findings that business conditions slowed over the holiday break will add to the feedback from the bank’s own anecdotal contact with business.
Certainly, some recent sales and trading updates from retailing and finance have been less than stellar.
“The deterioration in conditions in the month was driven by declines across trading, profitability and employment and was relatively broad-based across states and industries. Conditions remain particularly weak in the retail industry which reports further ongoing deterioration,” the NAB said in its survey commentary yesterday.
“Capacity utilisation remains above average, though forward orders are below average (and falling) and alongside below average confidence suggests conditions are unlikely to rebound.
“Monitoring the future conditions and orders track will be critical regarding our outlook for the economy in 2019,” the bank added.
Though business conditions are now below average, they are still positive given their high starting point in early 2018.
Business confidence was unchanged in December but has now hovered at below average levels for some time.
Alan Oster, NAB Group Chief Economist said yesterday in commentary; “While interpreting data around the holiday period can be difficult, the fall in December continues the trend decline in business conditions seen through 2018. Although conditions started the year at relatively high levels, these declines taken at face value suggest a significant slowing in business activity”.
“The weakening in conditions has become relatively broad-based with declines across all industries except mining over the past 6 months. The decline in conditions has also been evident across all states” said Mr. Oster.
In trend terms, conditions fell across all industries in December and remain highest in mining followed by finance, business & property services, recreational & personal services. Retail remains the weakest of all industries, and the only sector to record negative conditions.
“The business survey provides us with another perspective on weakness in the retail sector following the release of consumer side indicators over the past month. By sub-component, personal & household goods, as well as car retailing, suggest that discretionary retail is particularly weak” Mr. Oster said.
Despite the easing in conditions and confidence through the second half of 2018, capacity utilisation remains elevated, and while the capex index has been volatile in recent months, it edged up in trend terms in December.
The Nab says that both of these indicators suggest that business will continue to invest and continue to hire going forward, but may drop away if conditions materially weaken further.
“With conditions having weakened notably in December following a trend slowing over the second half of 2018 we will be looking to the next readings from the business survey to confirm if the true underlying pace of business activity has slowed as sharply as the December survey suggests, Mr. Oster said..
“With confidence remaining below average and forward orders having also declined our expectation is that, at the very least, a significant portion of the decline in business conditions will persist.
“If business activity has significantly slowed there could be some implications for the labour market and business capex – two important variables, whose outlook are critical for our outlook in 2019,” said Mr. Oster.
