This month’s NAB Business Survey remains true to theme of ongoing recovery in the non-mining economy, building on the already solid growth seen in the recent National Accounts. Services continue to lead the way, now including distributional services such as retail, while manufacturing has pulled back and mining (and related sectors) still look weak.
Overall, this outcome suggests that economic activity is holding up reasonably well, with the RBA more focussed on the inflation outlook – encouragingly, inflation indicators in the Survey picked-up a little this month. Financial markets have priced in another 25bp cut by year end, but without a very weak CPI result for Q2 and/or a markedly higher AUD, non-mining activity strength, together with financial stability concerns of even lower rates, are, on balance more likely to keep the RBA on hold.
The Q1 National Accounts confirmed the positive trend seen in the NAB Business Survey for non-mining business activity, with a notable contribution to growth coming from the service sectors. The story was much the same in May, with firms continuing to point to a favourable business environment, despite a further slip in business confidence.
Business conditions remained at a very elevated level (unchanged from last month), as a notable improvement in trading conditions (sales) and profitability offset a disappointing moderation in employment demand – consistent with more moderate rates of employment growth in recent months.
According to Alan Oster, NAB’s Chief Economist, “the Survey is suggesting further improvement for the non-mining sectors going into Q2, with some evidence that growth is becoming more broad-based”.
Overall business conditions were unchanged at +10 index points in May, which is well above the long-run average of +5. In regard to the make-up of conditions, Mr Oster noted that, “there is no doubt that things have remained strong on the activity side, but firms continue to be relatively restrained in terms of their demand for labour”.
Evidence in the Survey of a broader based non-mining recovery has been mixed, but most industries did record an improvement in business conditions for May.
“Service industries continue to lead the way, which now includes distributional services such as retail, but mining and construction remain quite weak, which is partly a reflection of the ongoing downturn in spending on resource projects,” said Mr Oster.
Despite elevated business conditions, firms are reporting slightly lower levels of confidence. The confidence index eased 2 points to +3 index points in May, pushing the index further below its long-run average.
According to Mr Oster, “the RBA’s cut to interest rates did not help lift business confidence as we had hoped, even as sales activity continues to improve”. He goes on to say that “uncertainty around the upcoming election might be a factor here, but mixed results across industries suggest that other factors are at play”.
Leading indicators from the Survey are looking reasonably good, with forward orders remaining in positive territory and spare capacity declining. “Given the very weak signals on investment intentions coming from elsewhere, we are encouraged to see that the positive trend in capacity utilisation rates has continued”, said Mr Oster.
“Firms are more likely to go out and invest or hire more workers if they see that their spare capacity is shrinking”, according to Mr Oster. Indeed, firms indicated an increase in capital expenditure in this month’s Survey.
Overall, these survey results give us confidence in our near-term view of the economic outlook, which sees the non-mining recovery remaining on track. With activity indicators staying resilient, the RBA is likely to be more focussed on the inflation outlook – encouragingly, inflation indicators in the Survey picked-up a little this month.
Consequently, the next ‘live’ RBA meeting is not expected until after the next CPI read in late July. Financial markets have priced in another 25bp cut by November, but without a very weak CPI result for Q2, positive activity trends are likely to keep the RBA on hold.