Business confidence recorded an unexpected increase in the month, with firms apparently shrugging off the sharp deterioration in consumer confidence that followed May’s Federal budget. Firms are sticking to their expectation for stronger activity despite business conditions remaining below long-run averages and no change to forward orders. Stronger sales are contributing to elevated confidence levels, with the survey suggesting this has encouraged firms to invest and rebuild their inventories. However, capacity utilisation eased further from relatively low levels.

Business conditions rose in the month to their highest level since January, ending the downward trend that emerged since the start of the year. Nevertheless, conditions remain below the long-run average for the monthly series, which along with soft conditions in wholesale (a bellwether industry), suggests little momentum for domestic demand in the near term. Although conditions improved for all industries, levels vary significantly – service industries remain the stand out, followed by construction (wholesale and manufacturing are weakest). Sales and profits are stronger, but employment is yet to respond.

Our wholesale leading indicator suggests weak underlying conditions, pointing to further below trend economic growth in the second quarter of 2014 – and little near term improvement in prospect in demand. Firms continue to report relatively benign inflation pressures, assisted by lower purchasing costs inflation and relatively low labour cost pressures. Retail inflation accelerated, but remains at low levels.

Further information is available at NAB Business Research & Insights,  or read the full NAB Monthly Business Survey – 2014.