Business confidence falls sharply as profitability plunges

Business confidence fell sharply in May, dragged down by instability in global financial markets, rising interest rates, the Resources Super Profits Tax and concerns about poor profitability.

NAB’s monthly survey of business confidence and business conditions showed the index tracking confidence fell from 13 index points to just 5 index points, well below the long-term average of 7 index points.

Confidence fell sharply in the mining sector (presumably due to the announcement of the Resources Super Profits Tax), the wholesale trade sector and the manufacturing industry.

The slide of the Australian dollar did nothing to improve the mood in the tourism-exposed recreation and personal services sector and the transport sector, with financial market instability likely to have weighed heavily on these entrepreneurs.

Actual business conditions fell for the second consecutive month, with this index dropping from 8 points to 6 points. The main reason for the fall was a big drop in the index that tracks profitability – it plunged from 7 index points to 1 index point – more proof that the recovery remains extremely patchy and discounting is still rife.

In contrast, business conditions across industries were quite mixed. Mining, construction and transport reported the strongest conditions. Conditions improved strongly in mining (particularly profitability, possibly reflecting higher contract prices for commodities) and construction (across all three components).

Conditions in the retail sector remain very weak, while conditions also worsened in the recreation and personal services, finance, business and property services, and wholesale.

NAB says the survey still implies economic growth of just below 4% over the coming year.