Business conditions fell slightly in the September quarter, while confidence posted a modest improvement according to the latest NAB Business Survey.
The four-point fall in conditions (to +7 index points) was driven by softer trading conditions and profits.
“Firms have been reporting very weak profit margins (albeit improving) in the Survey for quite some time, which is consistent with the fact that labour and purchase costs have consistently outstripped growth in final product prices,” NAB says.
“Mining was the only industry to report a positive margins index in Q3 2016 – which might be a reflection of higher commodity prices – while even the service industries (which are showing solid business conditions) are reporting extremely weak margins.”
While business conditions softened, they remain above the long-run average. “[Conditions] are consistent with solid rates of activity in the non-mining economy right now,” says NAB chief economist Alan Oster.
NAB highlights there was a notable deterioration in conditions in industries including retail and wholesale, while services-based industries tend to be the best performers.
Employment conditions was the only component to improve in the September quarter (up 1 to +3 index points).
Despite the overall softening in conditions, confidence levels improved slightly (up two points to +5).
“[This] suggests to us that firms are still reasonably comfortable about their operating environment, even with the numerous uncertainties emanating from overseas,” says Oster.
In addition, the survey found firms’ have a positive near-term outlook on their business and the economy.
“They don’t anticipate any clear deterioration in business conditions over the next 3-12 months, while hiring intentions for the next year actually picked up markedly and capital expenditure plans remain much stronger than what some other indicators might suggest,” Oster adds.
NAB reveals confidence varies across industries, with half of the industry groupings showing an improvement in the September quarter, and the other half deteriorating.
“Confidence is now highest in transport & utilities (+11), although the Survey was conducted prior to recent supply side developments in the oil market,” the report notes.
“Manufacturing was better than expected (at +9), considering the recent closure of auto manufacturing plants – suggesting the rest of the industry may actually be doing better.”