Summary: Business conditions improve in December; business confidence also improves slightly, still below long-term average; NAB: conditions remain strongest in services, noticeable improvement in retail; ACGB yields fall noticeably; rate-cut expectations harden; Westpac: paints picture of relatively stable but sluggish business conditions in Q4 2024; capacity utilisation rate rises to 82.8%.
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 300 firms conducted in the second and third weeks of January, business conditions have improved to a level close to the long-term average. NAB’s conditions index registered 6 points, down 3 points from November’s revised reading.
“Conditions remain strongest in services sectors,” said NAB Chief Economist Alan Oster. “But there was a noticeable improvement in retail conditions, which may reflect a pick-up in consumer spending at the end of 2024. We will have to wait and see whether this improvement is sustained over 2025.”
Business confidence also improved, albeit more modestly and only after a large drop in November. NAB’s confidence index ticked up 1 point to -2 points, a reading which is well below its long-term average. NAB’s confidence index typically leads the conditions index by one month, although some divergences have appeared from time to time.
Commonwealth Government bond yields fell noticeably across the curve. By the close of business, 3-year and 10-year ACGB yields had both lost 6bps to 3.84% and 4.45% respectively while the 10-year yield finished 5bps lower at 4.87%.
Expectations regarding rate cuts in the next twelve months hardened, with a February cut viewed as highly likely. Cash futures contracts implied an average of 4.265% in February, 3.97% in May and 3.70% in August. December contracts implied 3.555%, 78bps less than the current cash rate.
“While the NAB business survey update for October had given some hope that Australian businesses might be turning more optimistic in the December quarter, a deterioration November and only a small recovery in the latest survey for December painted a picture of relatively stable but sluggish business conditions in the last three months of 2024,” noted Westpac senior economist Mantas Vanagas.
NAB’s measure of national capacity utilisation increased from November’s reading of 82.4% to 82.8%, a level which is quite robust from a historical perspective. However, only four of the eight sectors of the economy were reported to be operating at or above 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.
