Australia: Business conditions hit record high in Feb, strength overstated? - Westpac

Andrew Hanlan, Research Analyst at Westpac, notes that Australian business conditions climbed to a record high in February the NAB business survey reports.

Key Quotes

“In February, the business conditions index increased by 3pts, building upon a 4pt rise in January, to be at +21. This is a record high for the monthly series (back to March 1997) and is in line with the high of 1994 for the quarterly series.”

“We were surprised by the extent of the strength in the January update, more so now that conditions moved higher still in February.”

“Given the balance of other indicators we are still inclined to discount some of the reported strength in business conditions. It may be that shifting seasonal patterns are distorting the results.”

“Business confidence remains at above average levels, albeit moderating a little in February, down 2pts to +9. The sharp sell-off in global equity markets at the start of the month may have well have dented confidence. More recently, equity markets have rebounded.”

“The survey reports that there is broad based strength in business conditions, with above average readings across each industry, albeit with recreational & personal only marginally so.”

“Strength is most apparent in construction, manufacturing and mining. No doubt that outside of housing, the construction sector is enjoying a sharp upswing, with synchronised strength in public infrastructure and commercial building. The capital stock is expanding to meet the needs of a fast growing population. There are significant spill-over effects to other sectors, notably manufacturing.”

“For the mining sector, higher commodity prices are boosting cash flows, resulting in a lift in confidence and increased spending on equipment.”

“It is also notable that - consistent with other indicators - the survey finds that growth is becoming more synchronised across the major states, against the backdrop of higher commodity prices. By state, business conditions for February are reported to be: Victoria, +23; NSW, +22; Qld, +25; and WA, +10.”

“For retail, while still underperforming, business conditions reportedly improved to +8.”

“Adding to our inclination to discount some of the strength in this update is a spike in the employment conditions index, as well as a spike in capital expenditure (albeit this series is more volatile).”

“The employment conditions index moderated to a reading of +6 in December and January, down from +9 during Q2 and Q3 last year. Then in February, the index jumped, up 10pts to +16, a record high. A reading of +6 points to solid jobs growth, whereas the +16, if sustained, would suggest jobs gains will in excess of population growth.”

“Forward orders increased sharply, up 8pts to +11. It may be that there was some clustering of orders, with the risk of a (partial) reversal in coming months.”