On the eve of the 2019-20 federal Budget, the National Australia Bank’s March survey of business conditions and confidence has picked up a small improvement in conditions.
The NAB said yesterday the report (which was brought forward by 10 days to before the budget) produced “mixed results”.
“Business conditions saw a welcome increase to above average levels with each subcomponent of the index rising. The employment index itself remains well above average, suggesting that for now, survey indicators of labour demand remain favorable.
“Against this, business confidence (the expectation for conditions going forward) weakened further in the month and continued the below average run.,” the NAB said.
The NAB reported that business conditions rose by 3pts to +7 index points in March, driven by increases in each of the index components.” Profitability (now +5) and trading (+12) are now just above average, while the employment index (+7) is well above average. Confidence fell 2pts in the month to 0 index points, continuing it’s below average run.”
The continuing strength reported in the labour market by the survey will give confidence to the Reserve bank ahead of its meeting today to consider monetary policy.
The continuing strength in the labour market is now the key statistics the RBA is watching as it wonders whether to cut rates or continue to sit and hold.
Economists do not expect any move today by the central bank with the Federal budget being delivered tonight.
The NAB said that other forward-looking indicators – capacity utilisation and forward orders – showed some improvement but remain at or below average.
“The pattern of business conditions and confidence across states appears to have shifted somewhat with the gap between the east and west narrowing a little over recent months,” the NAB commented.
“Conditions remain most favourable in Tasmania and NSW but have weakened in QLD and VIC. By industry, conditions remain most favourable in mining and weakest in retail.
“While the pickup in conditions this month is encouraging, conditions are well below the levels seen in early 2018 and forward indicators point to a risk of further slowing in momentum in the business sector. Elsewhere in the survey, measures of capex and cash flow generally continue to track down.
NAB Group Chief Economist Alan Oster said in yesterday’s statement “The increase in business conditions is a welcome development after the weakening trend over the past 6 months, though with forward indicators still looking weak we will be watching closely over the next few months to assess whether conditions in the business sector weaken further”.
“The slowing in official economic activity data over the second half of 2018 was in line with the deterioration in business conditions, and despite the improvement in March, our overall assessment is that activity likely remained weak in the first quarter of 2019,” said Mr. Oster.
“While the increase in conditions is a positive outcome given the weakening across a range of other macro indicators, the forward-looking parts of the survey suggest that there is some risk to this falling away. Forward orders are weak, and below average and capacity utilisation is now back to around average’ ” Mr. Oster said.
