Business conditions continue downward trend

Business conditions deteriorated sharply in May, according to the latest NAB survey, while non-mining sectors such as retail and manufacturing continue to drag on business confidence.

NAB’s Monthly Business Survey reveals business conditions fell four points to one point in May as the domestic economy continues to soften.

Business conditions are now only slightly above levels recorded in February, with the report suggesting the domestic sector is struggling to recover from the flood-induced slowdown in the March quarter.

“The conditions index is only a touch above the relatively weak levels recorded in February immediately following the floods,” the report says.

“The decline in the conditions index reflected broad-based falls in trading conditions (down 5 to +2 points), employment (down 3 to +1) and profitability (down 3 to 0).”

“The conditions index, at +1 point, is now five points below the long-term average level of +6 points. The multispeed economy is persisting, with strength in mining in stark contrast to the weakness in retail, manufacturing, wholesale and construction.”

On a state by state basis, business conditions continued to recover in Tasmania, up nine points to -8, while Queensland also recorded a five-point increase to six points.

Declines in conditions were recorded in NSW, Victoria and WA. While conditions remained strongest in WA and weakest in Tasmania, the variation in conditions across the states is narrowing.

The weakness in conditions appears to have dampened business confidence levels, although the index remains in positive territory at +6 points.

“The business confidence index is now a little below its long-term average level, though confidence remains quite varied across sectors and regions,” the report says.

The report reveals business confidence fell most significantly in finance, business and property, followed by transport and utilities, wholesale, and recreation and personal services.

“While confidence in manufacturing was unchanged in the month, the sector continues to report the weakest confidence levels of all industries, suggesting the high Australian dollar is continuing to weigh on sentiment,” the report says.

“Confidence levels were also negative in wholesale… Seasonally-adjusted confidence was strongest in mining.”

Not surprisingly, NAB expects growth in the resources sector to continue due to a “huge amount” of investment.

“The level of exploration and expenditure for projects in Western Australia and Queensland will continue in the June quarter,” it says.

As a result of the findings, NAB expects the next rate hike from the Reserve Bank of Australia in August, from 4.75% to 5%, followed by another hike towards the end of the year.