If the old cliché, ‘what goes up, must come down’ is true, then the obverse of that must be ‘what goes down must go up’ and that applies to the latest NAB report on business confidence and trading conditions.
After weakening in the past six months to a two year low in August, the NAB said yesterday that business confidence rebound quite sharply in September.
And trading conditions improved as well.
Many commentators have used the weakening in the NAB monthly business survey, and Westpac’s consumer sentiment survey (which is out today for last month) to support calls for interest rate cuts and made all sorts of claims about the weakness in domestic consumption and demand.
These comments supported some of the tosh coming from the likes of David Jones, Myer and Harvey Norman about how tough trading conditions were in their sectors, and extrapolating these claims across all retailing and much of the domestic economy.
That’s far from the case as we have found from the recent run of solid car sales data, overseas travel figures (and still solid inbound traveller numbers) and retail sales for July and August.
Yesterday the NAB said its index of business confidence rose to negative-2 in September, from a revised two-year low of negative-9 in August.
"The turnaround in confidence relative to a month ago suggests less concern about the impact of the global influences on activity within business," NAB chief economist Alan Oster said in yesterday’s statement
"The depreciation of the Australian dollar during the month is likely to have helped alleviate some stress on businesses competing on the global market, while the heightened expectation that domestic interest rates will be lowered by the RBA may also have provided some relief." (But the dollar is back up to parity overnight).
Conditions improved in all industries other than personal & recreational services – which was unchanged at strong levels and the NAB said that during September, there were large gains in manufacturing and mining conditions.
Despite this, conditions remain at depressed levels in manufacturing, construction, retail and wholesale.
Labour costs growth eased a little in the month, after solid outcomes in the previous two months. Final product prices softened in September, and retail price growth was also weaker.
The NAB survey revealed that trading conditions improved in September to a reading of 5, from negative-3 in August, while profitability rose from negative-6 to negative-2. Employment also rose to 3 in September from a flat reading in August.
"The pick-up in business confidence is a much better outcome than what could have been envisaged given the heightened uncertainty and volatility enveloping the global economy at present," said Mr Oster.
Showing the immediate impact of expectations for lower rates, business conditions swung into positive territory in the month, hitting 2 in September from negative-3 in August.
Trading conditions for manufacturing rose ‘‘very strongly’’ up 29 to negative-5 points in the month, ‘‘more than unwinding a sharp deterioration in the previous month, while conditions also improved solidly in transport & utilities, wholesale and construction.’’
NAB said the improvement in September didn’t impact the bank’s current economic forecasts.
The bank forecasts the economy to grow by 1.9% in 2011 and then to rise to 4.1% in 2012, with core inflation to remain around 2.5% over the next year, then rise to 3% in 2013 as momentum from the resources boom and the rest of the economy grows.
"Overall, the Survey’s activity readings, if maintained at current levels, are broadly consistent with underlying demand growth of around 3% in the December quarter (at an annualised rate) and GDP growth (ex coal) of 3½%," the NAB said yesterday.
"As such, we expect the RBA will need to lift rates by late 2012," said Mr Oster.
"However, in the near term, the RBA is more dovish and there is now a 50/50 chance of a reduction in the cash rate in coming months if inflation remains subdued and domestic demand and the labour market weakens further."
The November meeting is the date when we could see a rate cut, after the September quarter inflation data on October 26.
In its commentary, the NAB said:
The business conditions index recovered by a solid 5 points in September, lifting out of negative territory to +2 index points and unwinding consecutive declines recorded in the previous two months. While overall conditions remained fairly soft in September, the pick up in activity implies a shift in momentum towards a more expansionary economy, compared to an economy that had previously appeared to be losing traction. The improvement in conditions in the month reflected broad-based increases in trading conditions (up 8 to +5 points), profitability (up 4 to -2 points) and employment (up 3 to +3 points).
The conditions index, at +2 points, is now 4 points below its long-term average of +6 points (since 1997 for the Monthly Survey). However, if the Survey comparison is extended back to the timeframe of the full Quarterly Survey (1989), conditions are in fact a touch above the long-run average of +1 point.
Business confidence recovered sha
