The economy went off the boil a bit in February as business conditions and confidence slowed from the elevated peaks in January.
But according to the latest business survey from the National Australia Bank, both remain at levels pointing to solid levels of activity throughout most sectors.
The February survey results supports the commentary in the post meeting statement from this month’s RBA meeting a week ago when the RBA showed no sign of wanting to change rates at all.
The NAB said the business conditions index dropped 7 points, to +9 index points, seasonally-adjusted which is still above the long-run average (+5). Business confidence also gave back some ground, but has not quite returned to its December level (falling 3, to remain at a still high +7 index points).
NAB Chief Economist, Alan Oster, said "we were not surprised to see business conditions drop back from their multi-year highs, having flagged in last month’s Survey that we suspected a number of temporary factors probably underpinned the unbelievably strong result.”
"Even so, conditions are still holding up at levels that would make you reasonably comfortable about the near-term growth prospects for the economy, putting aside some of the concerning trends we are seeing in retail”.
The February survey showed most industries are showing solid, or improving, business conditions, and the fall in business conditions last month was largely driven by a big deterioration in recreation & personal services and smaller falls in transport and finance/property/business services.
“We saw the big service industries drive the moderation in business conditions this month, but even after pulling-back a little, these industries continue to lead the non-mining recovery”, said Mr Oster.
He added that, “it is encouraging to see so many industries reporting solid levels of business conditions, but it is hard to look past the disappointing results from retail, especially given the importance of consumption to the growth outlook. On a brighter note though, the industry seems to have lifted its demand for labour since last year”.
The NAB said weaker trading conditions drove much of the fall in conditions, although profitability eased as well – both remain quite positive overall however. Employment conditions also eased slightly, but the trend remains quite positive.
According to Mr Oster, “the trend in employment conditions has improved notably in the past two months, to a point where the index now suggests the economy should be producing enough jobs to bring down the unemployment rate should the participation rate remain steady.”
He said the NAB employment index has been suggesting faster employment growth than the ABS Labour Force Survey in recent months, but that hasn’t been happening. Economists are looking for a rise of 15,000 in the number of new jobs in February’s employment data tomorrow. The key will be the split between full and part time work and the participation rate.
“Business conditions are still at quite lofty levels, consistent with our expectation for the economy to enjoy solid rates of growth in the near-term,” Mr Oster said.
“However, it is the longer-term growth picture that we are more concerned about, particularly as the contributions from LNG exports, temporarily higher commodity prices and the residential construction boom fade, putting pressure on the labour market.
"However, the RBA has made it clear that they are putting increased emphasis on financial stability concerns, which is likely to impact the response of monetary policy”, said Mr Oster.
