Australia: Business conditions decline, reversing spike - Westpac

Andrew Hanlan, Research Analyst at Westpac, notes that the NAB business survey reported that the Australia’s business conditions index pulled-back in November, down 9pts to a still elevated and above average +12. That more than reversed the 7pts spike in October, which Westpac interpreted at the time as most likely noise, he further adds.

Key Quotes

“Business confidence moderated, down 3pts to +6, a reading in line with the long-run average. The survey was conducted from November 20 to 26.”

“How to interpret the survey? Setting aside the October spike and subsequent reversal, 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. In part this bias is due to the exiting of firms from some sectors, such as the auto industry.”

“Nevertheless, the survey has identified key emerging trends, around economic conditions and employment growth.”

“Following are some points of interest.

• Business confidence is off the highs of earlier this year, trending gradually lower since April, to be at average levels. Respondents cite concerns about the demand outlook, margin pressure and wage costs. To date, this has not adversely impacted the surveys measures of capex and employment demand.
• As to confidence by industry, construction, manufacturing and transport reportedly appear to be the major drivers behind the moderation, although confidence in each of these sectors remains relatively positive in a trend sense. Confidence in the mining industry has improved, to be at the highest levels since 2010/11.
• For the construction sector, business conditions are particularly buoyant, at +22 (on a 3 month average), with positive spill-over effects to manufacturing, at +18, as well as other sectors. Trend employment conditions are strongest in the construction sector.
• The expansion in construction work reflects a strong upswing in public infrastructure, a lift in private infrastructure activity, a rebound in commercial building and an elevate level of home building activity, albeit with the housing cycle beginning to turn lower
• Retail remains under pressure, consistent with official data, with business conditions at -1, inching 1pt lower in the month.
• The employment conditions index has been steady at a robust +7 for the past three months, down fractionally from +8 over the first half of the year. The survey suggests that this reading is consistent with near-term average monthly jobs growth of +20k, which would tend to place further downward pressure on the unemployment rate.
• The survey’s capex measure strengthened in November, extending a rebound evident over recent months. Readings for 2017 are up on those prevailing in 2016, consistent with the improvement in business investment evident this year.
• Business conditions are positive in each of the six states. Trend readings range from +13 for Qld to +22 for NSW, with WA the outlier at +2. The mining states of Qld and WA have experienced a marked improvement in 2017, benefitting from higher commodity prices and the diminished drag from the mining investment wind-down.”