Rebound in business conditions unlikely to be sustained

The December NAB Monthly Business Survey found that the business conditions index (an aggregation of trading conditions (sales), profitability and employment) increased by five points to +11 index points, which is well above the long-run average for the series (+5).

However, despite the positive result, NAB chief economist Alan Oster remains cautious given that other aspects of the survey suggest that the rebound may be temporary.

“The rebound in business conditions is certainly encouraging, but at this stage we are not getting too carried away with the result,” Mr Oster said. “Stronger business conditions in December largely reflected unexpectedly strong improvements in some industries, which might not be sustained, while other indicators were generally mixed as well.”

The improvement in business conditions was most apparent in wholesale and transport and utilities, while manufacturing and retail posted a deterioration.

“We were a little surprised by the strength in wholesale, particularly given much more subdued conditions in related industries such as manufacturing and retail,” Mr Oster explained. “Retail is now the weakest industry in the survey, which is concerning given the importance of consumption to the outlook.

Further, the improvement in conditions was driven primarily by higher trading conditions and profitability, while the employment index remained at relatively low levels.

Employment conditions have remained “stubbornly muted” according to Mr Oster and suggest the labour market is still not generating enough jobs to bring the unemployment rate down from its elevated level.

“That said, the employment index does point to slightly stronger employment growth than we have been seeing from the ABS Labour Force Survey of late,” Mr Oster added.

Meanwhile, business confidence remained steady over the year, unchanged at +6 index points in December, which is consistent with the long-run average.

“As for business confidence, the stability we have seen for some time now has been welcome, but it does not fully reflect the strength in business conditions. That might suggest that business still has a high degree of concern about global uncertainties in particular,” he said.

Overall, Mr Oster concluded that while the headline results from the survey indicate some improvement, the mixed results below the surface suggest that “a degree of caution” is warranted.

“Importantly, we are not seeing any real signs of a convincing recovery in non-mining investment in the survey, which is crucial to both near-term and longer-term growth prospects,” he elaborated.

A return to more “subdued” growth therefore seems likely, according to Mr Oster, as the positive effects from the housing construction cycle, commodity exports and (temporarily) higher commodity prices “wash out”.

Additionally, NAB expects two more 25 basis point rate cuts from the RBA this year in response to ongoing low inflation and a more subdued growth outlook.

[Related: Non-mining economy ‘losing steam’ as business conditions fall]