Business conditions improve despite Euro crisis

usiness conditions improved slightly in November, according to NAB’s Monthly Business Survey, while business confidence was unchanged despite the ongoing European debt crisis.

Business conditions rose by one point to +1 index point in November, with NAB chief economist Alan Oster describing the result as “more favourable than might have been expected”.

“However, business conditions were by no means equal across sectors,” Oster says.

“The pick-up in business conditions in the month reflected improvements in employment conditions and profitability, which were partly offset by a deterioration in trading conditions.”

“A majority of businesses reported an improvement in business conditions… [but] sharp declines in manufacturing and construction meant the overall increase in conditions was only marginal.”

Conditions picked up notably in transport and utilities, mining, wholesale, recreation and personal services, and retail, which reported the first non-negative read since March 2010.

Overall, business conditions remained strongest in mining (up 24 points), followed by recreation and personal services (up 12 points) and transport and utilities (up 10 points).

In contrast, conditions were weakest in manufacturing (-21) and construction (-12).

“The variation in business conditions across sectors has become increasingly pronounced since late 2009,” Oster says.

Oster says while the gap has narrowed in recent months, the “persistent divergence” in industry conditions confirms the economy is undergoing a structural transformation.

This transformation is toward mining and service-based industries, and away from traditional manufacturing and discretionary retailing.

On a state-by-state basis, WA reported the largest improvement in business conditions in the month, followed by Victoria, while conditions in Queensland also improved slightly.

Conditions again deteriorated sharply in Tasmania, softened in NSW and were unchanged in South Australia.

In level terms, conditions were strongest in WA (+13) while they expanded marginally in Queensland, Victoria and NSW. Tasmanian conditions were by far the weakest.

Meanwhile, business confidence levels deteriorated across most industries in November, with construction recording the most significant fall (down 14 points to +1 point).

Confidence also deteriorated significantly in mining (down 10 points) and transport and utilities (down 4 points).

However, confidence increased in finance/property/business (up five points to +4 points) and recreation and personal services.

In level terms, seasonally-adjusted confidence was strongest in retail (+6) followed by finance/business/property, and wholesale. It was weakest in transport and utilities, and mining.

Oster says the ongoing financial crisis in the Euro-zone is “seriously damaging” European business confidence and affecting economic activity.

“We are now expecting a deeper recession in that region, with spill-over effects around the world,” he says.

“Australian national accounts data heralded the start of the long-awaited mining investment boom, while consumption growth remains firm.”

“We see these components supporting further growth in the Australian economy in the medium-term… We see year-average growth of 2.1% this year, around 4.5% in 2012.”