Business confidence at two-year high

Australian businesses appear to have all but shrugged off the downturn and are looking towards better times, with business confidence jumping to levels not seen since August 2007.

According to the latest NAB business outlook, business confidence jumped six index points in July to 10 points, the best reading in almost two years.

Confidence is increasing across the economy, but is strongest in construction, wholesaling, transport and manufacturing.

Importantly for the outlook going forward, the index that tracks forward orders has also jumped sharply thanks to strong orders in manufacturing, construction and mining. The forward orders index is now at its strongest level since December 2007.

NAB’s chief economist Alan Oster welcomed the results and said the broad rise in confidence was encouraging, particularly in sectors that have been struggling.

“It was notable that particularly strong gains were made in manufacturing and construction. These sectors have previously lagged and are now benefiting from the infrastructure phase of the Government’s stimulus package.”

But he also says that even more important than the improvement in confidence was the lift in actual business conditions, which held onto the gains seen in June (when this index jumped 10 index points) and even increased by a further three index points in July.

“After the very sharp increase in June driven by the timing of government stimulus packages it could well have been that conditions would moderate somewhat in July,” Oster points out.

The big question is: Can the improvements in business confidence and conditions be maintained?

Despite the good readings for July – particularly the data for business confidence – Oster is worried and argues the improved readings in construction and manufacturing may be directly related to the Government’s stimulus measures around infrastructure, school improvements and the first home owners grant.

He also points to weakness in conditions for the retail and wholesale sectors, which could be feeling the affects of other stimulus measures coming to an end.

“The fading of the impact of cash handouts, the passing of the investment allowance on cars for large operators and reduced FHOS impacts are clearly starting to impact.”

For the moment, Oster will be remaining cautious.

“Overall, we are still very much in the camp that, however welcome the current strength might be, it will not be able to be sustained.”