Business confidence falls due to global turmoil

Business confidence has plummeted during August as global markets remained volatile following debt crises talks in Europe and a series of poor economic indicators coming out of the United States, according to the latest NAB monthly business survey.

The survey found that while conditions only suffered a marginal drop of two points to negative three, confidence fell 10 points to minus eight. The hit was felt across all industry, except recreation and personal services and construction.

The result is that the Reserve Bank is expected to keep rates on hold for a “considerable period”, with a 25 basis point rise in mid-2012.

The biggest hits to confidence were found in the finance, business and property sectors, while confidence remains lower than the long-term average.

While NAB economist Alexandra Knight said the drop was not unexpected, it does suggest that businesses are wary about how the current outlook for the global economy will affect them.

“The recent run of softer local economic data and the uncertain future path for domestic interest rates are also likely to have influenced the weaker confidence outcome in the month,” she wrote.

“The current level of business confidence is well below the average of the series.”

Confidence is highest in Western Australia, where the index remained unchanged, but the biggest fall was found in Tasmania, down 23 to negative 35 points, although on a small sample. South Australia fell 13 points to -18, while New South Wales fell 12 points to -11.

However, business conditions actually improved in Tasmania, up five to -18 points, while conditions fell in South Australia by 20 points to -6.

“The multi-speed nature of the Australian economy was again highlighted in the survey. Manufacturing, retail, wholesale and construction conditions remained very weak,” Knight said, noting that manufacturing conditions had actually fallen quite sharply with numerous job cuts.

“Against that, mining and the service sectors generally remained strong.”

Business conditions were weaker in manufacturing and mining, although conditions improved in recreation and personal services, and transport and utilities.

Labour costs continued to rise up 1.4%, although this was lower than the July result which occurred just after the Fair Work minimum wage decision. Increases were highest in transport and utilities, up 2.3%, and in mining, up 2%.

Price inflation increased by 0.4% at a quarterly rate, with retail prices up just 0.2% after falling 0.7% in July.

“Retailers appear to have increased their prices in line with their increase in purchase costs in the month, suggesting that retailers are keeping their margins relatively stable,” Knight said.

“Consistent with a deterioration in retail trading conditions in the month, profitability in retailing also declined by a similar degree.”

However, profitability improved in recreation and personal services, and in transport and utilities, but fell in other sectors. Profitability was strongest in mining.

Employment conditions fell in construction, mining and manufacturing, down 10 points, four points and one point respectively. However, employment conditions improved in transport and utilities.

“This supports the notion that the Australian economy is undergoing a structural transformation, and the speed of employment changes in different industries will test the capacity of the economy to absorb this restructuring.”

NAB has kept its growth rates unchanged, with 1.9% in 2011 rising to 4.1% in 2012. Core inflation is set to rise above 3% in mid-2013.