Summary: Business conditions deteriorate in August; business confidence also deteriorates, well below average; NAB: weaker trading conditions, profitability may now be feeding into labour demand; ACGB yields fall; rate-cut expectations firm, first cut fully priced in for February; NAB: survey suggests soft private sector growth in Q2 has carried into Q3, may be translating into softer labour market; capacity utilisation rate up, still at elevated level.
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 improved markedly over the next twelve months and subsequently remained at robust levels until recently.
According to NAB’s latest monthly business survey of around 500 firms conducted in the second half of August, business conditions deteriorated back below the long-term average. NAB’s conditions index registered 3 points, down 3 points from July’s reading.
Business confidence also deteriorated. NAB’s confidence index fell 5 points to -4 points, a reading which is well below the long-term average. NAB’s confidence index typically leads the conditions index by one month, although some divergences have appeared from time to time.
“The fall in conditions was driven by a drop in the employment subcomponent, suggesting that weaker trading conditions and profitability may now be more materially feeding into labour demand,” said NAB Chief Economist Alan Oster.
The report came out the same morning as the latest Westpac-Melbourne Institute consumer sentiment survey and domestic Treasury bond yields fell on the day, steepening the yield curve. By the close of business, the 3-year ACGB yield had lost 2bps to 3.52% while 10-year and 20-year yields both finished 5bps lower at3.92% and 4.33% respectively.
Expectations regarding rate cuts in the next twelve months firmed, with a February 2025 rate cut fully priced in. Cash futures contracts implied an average of 4.335% in September, 4.32% in October and 4.275% in November. February 2025 contracts implied 4.08% while August 2025 contracts implied 3.42%, 92bps less than the current cash rate.
“With the recent National Accounts showing very soft private sector growth in Q2, the business survey suggests this has carried on into the new financial year and may be beginning to translate into a softer labour market,” Oster added..
NAB’s measure of national capacity utilisation increased from July’s reading of 82.7% to 82.9%, a level which is quite elevated from a historical perspective. Seven of the eight sectors of the economy were reported to be operating at or above their respective long-run averages, the wholesale sector remaining the one exception.
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.
