Summary: Business conditions steady in June; business less pessimistic, still below average; NAB: leading indicators in the survey point to softness ahead; Westpac: sharp weakening of business conditions evident in May confirmed in June; capacity utilisation rate declines, remains elevated.
NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s index then began to slip and forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 as the index trended lower. It hit a nadir in April 2020 as pandemic restrictions were introduced but then conditions improved markedly over the next twelve months. Subsequent readings were generally in a historically-normal range until the second half of 2022.
According to NAB’s latest monthly business survey of around 500 firms conducted in last week-and-a-half of June, business conditions have remained steady at a level which is slightly above average. NAB’s conditions index registered 9 points, unchanged from May’s revised reading.
Business confidence improved. NAB’s confidence index rose from May’s revised reading of -3 points to zero, still below the long-term average. Typically, NAB’s confidence index leads the conditions index by one month, although some divergences have appeared from time to time.
“The resilience came despite warning signs of slowing growth elsewhere in the survey in recent months,” said NAB Chief Economist Alan Oster, “and leading indicators in the June survey continued to point to softness ahead with confidence at 0 index points and forward orders remaining in negative territory.”
The report was released on the same day as the latest Westpac-Melbourne Institute consumer sentiment survey and Commonwealth Government bond yields fell on the day. By the close of business, the 3-year ACGB yield had shed 10bps to 4.11%, the 10-year yield had lost 11bps to 4.18% while the 20-year yield finished 8bps lower at 4.41%.
In the cash futures market, expectations regarding further rate rises softened. At the end of the day, contracts implied the cash rate would rise from the current rate of 4.07% to average 4.20% in August and then to 4.27% in September. February 2024 contracts implied a 4.545% average cash rate as did May 2024 contracts, 47bps more than the current rate.
Westpac senior economist Andrew Hanlan took a similar line to NAB’s Oster. “The sharp weakening of business conditions evident in May was confirmed in June, as forward orders record back-to-back declines, while business confidence remains soft and fragile.”
NAB’s measure of national capacity utilisation declined from May’s revised reading of 84.5% to 83.5%, remaining at a historically-elevated level. All eight sectors of the economy were reported to be operating above or at their respective long-run averages.
Capacity utilisation is generally accepted as an indicator of future investment expenditure and it also has a strong inverse relationship with Australia’s unemployment rate.
