Business conditions improve, but NAB two-speed economy could be coming back

Business conditions improved during September, according to the latest NAB Monthly Business Survey, while confidence remained flat as expectations for profits and overall trading activity remain solid in the lead-up to Christmas.

But NAB chief economist Alan Oster also says the survey indicates the re-emergence of a multi-speed economy, with trading and profitability remaining high in the mining sectors while staying subdued in areas such as retailing.

“The survey results continue to highlight the re-emergence of a multi-speed economy in Australia. Trading and profitability are exceptionally strong in mining but negative in retailing,” Oster says.

“Manufacturing has reported negative employment conditions for four months in a row, probably because its trade-exposed sectors have been pressured by slowing global growth and then by the appreciating AUD.”

The NAB survey found business conditions increased by two points to seven, while confidence fell one point to 10 points.

Oster also says that while business confidence decreased by one point, the index is stabilising at around 10 points and is now higher than the long-term average. “Reduced turbulence in European financial markets may have played a role in the improvement in sentiment,” he says.

Trading conditions increased from five to 13, while profitability increased from four points to six.

“Trading conditions improved strongly in mining and construction, and solidly in retail and finance, but declined in transport and utilities and manufacturing. In trend terms, trading remained strongest in mining and transport and utilities, and was also high in recreation but was still well into negative territory for retail and just below zero for wholesale,” Oster says.

However, Oster also says conditions have remained poor in retail, wholesale and manufacturing, industries all affected by the strong Australian dollar.

Employment decreased by one point to two, and although the index is now at a new low for 2010 Oster points out it is still in positive territory. Export sales have fallen to negative four as the high Australian dollar puts pressure on businesses.

Confidence in September improved across all industries, although it is strongest in wholesale and transport, and weakest in construction and retail. Forward order rose by nine points, “reversing the disturbing decline that emerged in July”, while capacity utilisation rose 0.4 points and stocks moved into positive territory for the first time in four months.

Capital expenditure has fallen from six to four, but is still in positive territory. Labour costs have continued to grow, with trend wages growth now exceeding 6% per annum.

Global growth forecasts have been downgraded slightly from 4.7% to 4.6% in 2010, and from 4.3% to 4.4% in 2011. “Stronger growth forecasts for a number of the smaller emerging market economies are largely offset by a slightly weaker forecast for China.”

Local growth forecasts have remained unchanged at 3.25% in 2010 and 3.75% in 2011, with Oster saying forward orders, capacity utilisation and stocks activity all indicate domestic economic activity is “starting to turn around”.

Oster also points out that while the RBA kept rates on hold this month, “we see this as a temporary reprieve”. NAB now expects interest rates to rise by 100 basis points by August next year, with the next rise to “come as early as November, depending on the data”.

“In particular, if the September quarter CPI numbers to be released on October 27 are weak, the RBA may skip November but choose to go in December.”