Business conditions jump in January

The NAB Monthly Business Survey’s business conditions index (an average of trading conditions (sales), profitability and employment) jumped six points in January to +16 index points, which the bank says is “well above the long-run average” for the series (+5).

Business confidence was also stronger in the month, rising four points to +10 index points.

According to Alan Oster, NAB’s chief economist, the recent strength in the business survey is consistent with an anticipated rebound in economic activity, following “very weak” Q3 National Accounts.

“With that said, a confluence of seasonal factors suggests it is unwise to get too carried away with the result just yet, especially as some key industries remain fairly weak,” Mr Oster pointed out.

Outcomes for business conditions were quite varied across industries in January. While service industries remained the best performers, wholesale conditions deteriorated, which Mr Oster said was to be expected given that the previous month’s improvement in this sector came as a surprise.

“However, it was encouraging to see improvements in some other key industries, which included mining and retail, both of which are no longer negative. This trend for retail is still very soft, which suggests the outlook for consumption remains cloudy,” he elaborated.

Rising trading conditions contributed to the strength in business conditions, but Mr Oster highlighted that there was also a noticeable improvement in employment conditions.

He explained: “The employment index has now hit its highest level since 2011, having previously been stubbornly muted for some time. This month’s jump in employment conditions bodes well for the generally underperforming labour market, and suggests stronger job creation that we’ve seen from the ABS in their labour force survey lately.”

Mr Oster said that overall the economy is expected to bounce back from the negative results seen in Q3 as temporary factors that weighed it down “wash out”.

“The NAB Business Survey confirms the strength of that recovery, but its longevity may still be up for question,” he said.

“NAB Economics continues to have concerns for the longer-term growth picture, as the construction of LNG exports, temporarily higher commodity prices and the residential construction boom fade, keeping pressure on the labour market.

“That said, in light of the recent flow of data, NAB’s economic forecasts (which includes expectations for the RBA’s cash rate) are currently under review,” he concluded.

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