Summary: Business conditions improve in July; business confidence deteriorates, below average; NAB: supply, demand moving back into balance, inflationary pressures continue easing; ACGB yields fall moderately; rate-cut expectations firm; NAB: capacity utilisation falling on trend basis; capacity utilisation rate down, 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 380 firms conducted in the second half of July, business conditions improved after four consecutive months of deteriorating and are now back to a level just below the long-term average. NAB’s conditions index registered 6 points, up 2 points from June’s reading.
Conversely, business confidence deteriorated. NAB’s confidence index fell 2 points to +1 point, a reading which is 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 survey continues to show that supply and demand in the economy are moving back into balance and that inflationary pressures continue to ease,” said NAB Chief Economist Alan Oster.
Domestic Treasury bond yields fell moderately across the curve on the day, largely in line with movements of US Treasury yields on Monday night. By the close of business, the 3-year ACGB yield had lost 4bps to 3.60%, the 10-year yield had shed 5bps to 4.01% while the 20-year yield finished 3bps lower at 4.40%.
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 4.32% in September, 4.285% in October and 4.20% in November. February 2025 contracts implied 4.03% while July 2025 contracts implied 3.63%, 71bps less than the current cash rate.
“There was a sizable decline in capacity utilisation in July, and while we would caution against putting too much emphasis on a single month’s result, particularly as it was driven by a few sectors, it is also falling on a trend basis,” Oster added. “ This provides further evidence that the rebalancing in supply and demand that the RBA is looking for is occurring.”
NAB’s measure of national capacity utilisation declined from June’s revised reading of 83.4% to 82.7%, a level which is still 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.
