Australian businesses sentiment dropped down a notch in October and it is now at below-average levels. According to NAB’s latest monthly business survey of 400 firms across the non-farm business sector in the last week of October, the Business Confidence Index fell 2 points to 4 while the Business Conditions Index also fell back 2 points to 6.
Bond market yields were essentially unchanged and the local currency was slightly firmer against the USD, although domestic economic data was taking a back seat to speculation regarding the US presidential election on that night.
Westpac’s chief economist, Bill Evans, thought the data suggested Australia’s economy has just finished passing through a tough patch mid-year. “We interpret the current weakness in business conditions as suggesting that the Australian economy hit a soft-spot around mid-2016. Jobs growth has slowed after overshooting in 2015, the housing sector had cooled in the wake of tighter lending conditions and real retail sales fell by 0.1% in Q3.”
Leading indicators such as forward orders and capacity utilisation also fell. NAB described these falls as worthy of “close monitoring” but they are not yet significant enough to change NAB’s outlook unless they continued in coming months. “…if the recent trends were to continue, it would be unsettling and imply that the non-mining recovery has started to run out of steam earlier than expected.” Bill Evans was more positive in his short term view for the Australian economy. “At this stage, we expect conditions to regain momentum as we move into 2017. Also, some of the uncertainty around public policy has eased with the Federal election behind us. A risk to this view is that weakness in employment is more enduring than we expect, with flow-on effects to consumer spending.”
NAB’s chief economist Alan Oster partly agrees with his Westpac counterpart about 2017. “For now though, we would only be looking to slightly lower 2017 forecasts and remain reasonably comfortable with the near-term outlook – which is expected to be supported by commodity exports and the housing construction cycle.” However, he expects interest rate cuts as Australia’s economy slows in 2018. “Beyond the near-term, impetus from those growth drivers will fade which will see the economy slow into 2018…Two more 25bp rate cuts are still expected from the RBA next year in response to ongoing low inflation and a more subdued growth outlook.”