Australian businesses are still confident despite external shocks such as the UK’s vote to leave the EU and the uncertainty in the aftermath of the Australian Federal election. In NAB’s latest monthly business survey, the Business Conditions Index moved 3 points lower from a revised June figure of 11 (previously 12) to 8 while the Business Confidence Index fell 1 point to 4 from a revised June figure of 5.
According to NAB the confidence stems for elevated business conditions which are still well above the long term average. It indicates what NAB described as a “steady” recovery in non-mining activity but with “sharp deteriorations” in the transport and wholesale segments. Alan Oster, NAB’s chief economist said, “Business confidence continues to show resilience despite the number of external factors…Business conditions remain quite elevated despite easing back in the month of July.” However, some sectors of the economy are of concern. “Signs of a broadening recovery in recent months have again become more obscure following sharp deteriorations in transport and wholesale.”
These concerns have led Mr Oster and NAB to revise their outlook for official interest rates over the next 12-18 months as GDP growth dampens. Short-term positives for the Australian economy are expected to give way to weaker offshore demand and less construction spending. “While the survey points to a reasonably upbeat outlook for the near to medium-term, longer term risks are becoming increasingly apparent, particularly going into 2018 as resource exports start to level off and dwelling construction turns negative.” His view has led him to join ANZ’s head of Australian research Felicity Emmett in speculating about the “non-conventional monetary policy measures” the RBA may take in the face of continued low growth and low inflation.
Bond and currency markets reacted to the new figures in a manner which suggest lower interest rates are more likely, but the movements were not large. The AUD immediately fell from 76.5 US cents to 76.4 US cents before recovering. Implied yields on 3 year bonds and 10 year bonds both fell 2bps to 1.40% and 1.95% respectively.