Australia: Business conditions spike – Westpac

Andrew Hanlan, Research Analyst at Westpac, notes that Australia’s October business conditions were up 7pts to +21 while the business confidence was unchanged at +8.

Key Quotes

“The NAB business survey for October was positive, with the business conditions index jumping 7pts to +21, a new all time high. Trading conditions and profitability rose, while employment conditions were unchanged at +8. Business confidence was also unchanged at +8, a reading a little above average. The survey was conducted from October 25 to 31.”

“The October update likely overstates the underlying strength of the economy, with the lift in conditions probably including an element of noise. Manufacturing business conditions surprisingly spiked and conditions in NSW also jumped sharply - both of which may reverse in November.”

“Confidence was unchanged, capacity utilisation edged lower in the month and forward orders moderated, to a still above average +2.5 from +4. This detail supports the notion that the lift in conditions is due to noise.”

“The economy has gained momentum in 2017, consistent with our expectations (ahead of an anticipated slowdown in 2018). The ABS reports that hours worked grew by a well above trend 2.8% in the year to September quarter 2017, up from 0.8% for 2016. The business conditions index averaged +14 for the initial 3 quarters of 2017, up from a +9.5 average for 2016.”

“This strengthening of the Australian economy, post the Federal election disruption in 2016, mirrors the lift in world growth. It is has been supported by a positive turnaround in construction activity, public and private, and the income boost from higher commodity prices. The business survey reports that orders are highest in the construction sector.”

“Jobs growth for the past six months is running at 4% annualised, a seven year high - strength that was correctly foreshadowed by the employment conditions index, with the near-term outlook remaining positive. Notably, jobs growth momentum is evident across each of the four major states.”

“In trend terms, mining along with construction have the best employment conditions, the survey reports.” 

“That said, Australia’s economic expansion remains uneven, with households under pressure at a time of high debt levels and weak wages growth (with a lack of pass through to date from stronger national income).”

“Retail conditions have been weak and volatile, with official data reporting real sales grew by only 0.1% in Q3, following a 1.5% jump in Q2 (associated with the boost post Cyclone Debbie), to be 2.6% above the level of a year ago. The business survey reports that retail conditions remain weak, albeit improving to a flat reading in October, up from -5. Conditions in personal services improved to +21 from +14, the question is whether this will be sustained.”

“By state, business conditions are positive across the board, led by NSW and Victoria, with a marked improvement in the mining states of WA and Qld.”