Conditions rebound, but down trend continues. Conditions: up 4pts to +7. Confidence: up 1pt to +4.

The NAB business survey confirmed that the down trend in business conditions has extended in to 2019 – notwithstanding a modest partial rebound in January.

The business conditions index rose by 4pts following an 8pts plunge in December (note that the December read was revised up to +3 from +2). Some of the December decline was evidently due to statistical volatility – which is greater around the holiday period.

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Business confidence was little changed, edging up 1pt to a still below average +4.

The survey was conducted from January 24 to 31. This follows on the heels of the December survey which was conducted from January 8 to 14 (the December survey is delayed each year due to the end of year holidays).

The current reading for business conditions, of +7, is broadly in line with average levels (for the monthly series dating back to March 1997).

Notably is the loss of economic momentum since the first half of 2018, when the conditions index averaged +18. The deterioration in business conditions on a 6 month basis is particularly stark – not as sharp as during the GFC and the introduction of the GST, but otherwise the weakest period in the past 20 years (see chart opposite).
Business conditions staged a ‘v-shaped’ recovery during the GFC and GST episodes – but only after an aggressive easing of policy.

The slowing of the Australian economy is centred on housing and the consumer. Retail sales all but stalled over the second half of 2018, as weak wages growth, high debt levels and falling house prices impacted. Dwelling approvals collapsed late in 2018 as the housing downturn gathered pace after lending conditions were tightened further. The global economy also lost momentum during 2018 with trade slowing and uncertainty increasing. However, a plus is that some key commodity prices (eg iron ore) remain elevated.
Business conditions details for January are: trading conditions up 3pts to +10; profitability up 4pts to 5; while employment rebounded by only 1pt to +5.

Businesses willingness to hire and invest is another important consideration for the outlook this year.

The survey suggests that employment conditions currently are consistent with near-term job gains of +19k per month – which is only a little below the 2018 average of +21k and would likely hold the unemployment rate steady. We would note that employment conditions are now almost back to the levels prevailing at the end of 2016 (see chart).

Capacity utilisation levels moderated in January to now be only just above average levels – with reportedly most industries now at below average levels. This may have implications for both future employment and capex plans.

By industry, retail conditions remained very weak (at -14); finance, business & property softened further (to +7) but construction rebounded partially (to +10), so too transport (to +2).

By state, conditions failed to rebound in NSW (at +6) and in Victoria (at +5), while Qld managed a weak rebound (to +5).


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