Australia: Business conditions elevated, confidence off April high – Westpac

The NAB business survey reported that Australian business conditions were still elevated in May but that confidence gave back April’s gain, notes Andrew Hanlan, Senior Economist at Westpac.

Key Quotes

“In May, the conditions index edged 1pt lower to +12. This is well above the long-run average for this series, of +1 (dating from 1989), but below the highs of 2007 ahead of the GFC.”

“The components of business conditions for May were: trading conditions steady at +17; profitability down 4pts to +10; and employment conditions down 1pt to +6.”

“Business confidence pulled-back in May, down 6pts to +7, giving back fully the jump of 6pts in April. As noted, the April update was taken in the lead-up to the Federal budget. Between the two surveys, sentiment on global financial markets soured somewhat (the ASX200, which made a run for the 6,000 level late in April, fell by 3%).”

“Confidence at +7 is a little above the long-run average, of +5, and is up a little from the levels prevailing over the first half of 2016, averaging +5.”

“The elevated level of the business conditions index is overstating actual conditions across the broader economy, as it has tended to do since the GFC.”

“Arguably, the survey suggests that the Australian economy is experiencing a trend improvement in underlying conditions after the slowdown in mid 2016, which was associated with the July Federal election. The official data, which has been more mixed of late, has been greatly impacted by weather disruptions early in 2017.”

“We expect the economy to rebound from these temporary disruptions, although to be constrained by lacklustre consumer spending at a time of weak wages growth.”

“As to the jobs market, there has been some improvement. The ABS reports that annual employment growth has lifted to 1.6%, up from 0.9% in December. This brings actual employment growth more into line with the NAB employment conditions index. The survey suggests that the recent trend improvement in employment will be sustained in coming months. Although we note that hours worked, as measured by the ABS, remains relatively subdued.”

“By industry, a trend improvement in business conditions is evident in mining (supported by higher commodity prices); construction (as the mining investment drag reduces and with a boost from public works); manufacturing; as well as wholesale and transport & utilities (consistent with the strength of goods imports). Conditions in finance, business & property have cooled, as lending conditions for housing have tightened. The NAB survey indicates disappointing conditions in the consumer sectors: retail is soft, albeit up from its lows; and recreational & personal has moderated.”

“By state, business conditions for May are positive in all six states. A trend improvement is evident in the mining states, with WA edging into positive territory. Trend conditions are most favourable in the major non-mining state of NSW and Victoria, albeit off their highs.”