Business conditions ease

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By CommSec

NAB Business survey

  • Business survey: The NAB business conditions index fell from 17-month highs, down from +11.8 points to +9.2 points in April. And the business confidence index eased from a 6-month high of +6.2 points to +5.1 points (long-term average +5.8 points). The survey was conducted from 15-21 April.

What does it all mean?

Business conditions may have eased a touch in the latest reading but it is hardly anything to be concerned about. The weakness follows a strong March result, which showed business conditions holding at 17-month highs. In fact, the rolling annual average continues to strengthen, now holding at a fresh 8-year high of +9.3 points (highest since July 2008).

The weakness in the latest result essentially stems from the uncertainty surrounding potential policy decisions from the Federal Budget (released tomorrow night) and also the upcoming Federal election. At least the uncertainty about the Federal Budget will be soon over. And more importantly if there is a drive to spend up big on infrastructure growth it would be beneficial in support business confidence and conditions.

Unfortunately elections cause consumers and businesses to hold back on spending, employment and investment plans, and that is the risk to the positive momentum that has built up in recent months.

On an encouraging note, the sub-indices of the business survey are holding up relatively well. Trading conditions and employment remain healthy (employment at 5-year highs), while forward orders lifted in April while profitability eased from 17-month highs.

What do the figures show?

National Australia Bank Business Survey:

  • The NAB business conditions index fell from a 17-month high of +11.8 points to +9.2 points in April. But the rolling annual average rose from +8.9 points to a near 8-year high of +9.3 points (highest since July 2008). The business confidence index eased from a 6-month high of +6.2 points to +5.1 points (long-term average +5.8 points). The survey was conducted from April 15-21.
  • NAB noted: “Industry outcomes for business conditions provided less evidence of a broadening non-mining recovery (beyond the services sector) compared to last month, but a number of additional industries looked more upbeat. Retail conditions (up 7) more than bounced back from last months decline, but finance/ property/business (FPB) services were the only other industry to improve in April. In contrast, there was a surprisingly large decline in construction (given the elevated levels of residential construction activity), although this may reflect weakness in non-residential segments.”
  • “Business conditions fell notably in WA (down 14) and Victoria (down 13). This was only partially offset by a big gain in NSW (up 11) and a moderate lift in SA (up 3). In trend terms, conditions are positive in all states other than WA, with the major eastern states still the best performing of the mainland states. In terms of confidence, Qld and SA both fell 7 points in April, while confidence in WA (up 6) turned positive.”
  • Components. The index of trading conditions fell from +17.4 points to +15.4 points; employment held steady at +4.4 points; profitability fell from +14.5 points to +8.8 points; forward orders rose from -0.8 points to +1.7 points.
  • Inflationary indicators were mixed in April. The monthly reading of labour costs rose at a 0.6 per cent quarterly rate in April, after a 0.7 per cent lift in March. Purchase costs rose at a 0.2 per cent quarterly rate in April, after a 0.5 per cent rise in March. Final product prices were up by just 0.1 per cent in April, after a similar rise in March. And retail prices were up by 0.3 per cent in April after a 0.5 per cent gain in March.
  • Capacity utilisation fell from 82.1 per cent to 81.4 per cent, but remained above the long-term average of 81.0 per cent.
  • The proportion of firms reporting that they did not require credit lifted from around 72 per cent to 75 per cent in April.

What is the importance of the economic data?

The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications for interest rates and investors?

Clearly the latest business survey suggests that current interest rate settings are appropriate and that further stimulus is not required. The Australian economy is nicely balanced at present with healthy business conditions, confidence that is neither euphoric nor downbeat, a well-balanced job market, and an economy characterised by strong home building and an absence of price pressures.

The Reserve Bank will debate the merits of another rate cut. Market pricing is holding at around 52 per cent for a further cut of quarter of one percent – taking the cash rate to a historical low of 1.75 per cent.

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