Business conditions and confidence improve amid rate cut talk

Business conditions perked up in September amid talk of an interest rate cut and the falling Australian dollar, the latest NAB survey shows, but global uncertainty is still having an impact.

According to the NAB Business Survey for September, business conditions rose 5 index points to 2 points, reversing the trend of consecutive declines in previous months.

“While overall conditions remained fairly soft in September, the pickup in activity implies a shift in momentum towards a more expansionary economy,” NAB says in its report.

“The improvement in conditions in the month reflected broad-based increases in trading conditions (up 8 to +5 points), profitability (up 4 to -2 points) and employment (up 3 to +3 points).”

“Conditions improved in all industries other than personal and recreational services, which was unchanged at strong levels.”

“There were large gains in manufacturing and mining conditions. Despite this, conditions remain at depressed levels in manufacturing, construction, retail and wholesale.”

NAB noted that the variation in business conditions has become increasingly pronounced since late 2009, which “indicates the Australian economy is undergoing a structural transformation towards mining and service-based industries, and away from traditional manufacturing and discretionary retailing”.

Business confidence also rebounded in September, lifting seven points to -2 points, helped along by the sharp depreciation of the Australian dollar and growing speculation of an interest rate cut.

“Confidence rose across a majority of industries, implying that the lower Australian dollar provided some relief,” NAB says.

The largest pickup in confidence was in manufacturing, followed by finance/property/business, transport and utilities, and retail.

The weakest confidence levels were recorded in wholesale (-13 points), followed by construction (-9 points).

CommSec economist Craig James says the improvement in confidence is good, but it might not last too long.

“Australian businesses aren’t about to break into song but they were less gloomy in the latest month, and the weaker Aussie dollar probably had a lot to do it,” he says.

“Businesses have been roundly complaining about the strong currency and seemingly their prayers were answered with the Aussie falling around 10 cents in the space of a month.”

“The bad news is that just as quickly as the Aussie fell, it has just as quickly rebounded, lifting six cents from lows set a week ago.”

“In other words, the pressure is back on retailers, manufacturers, exporters and tourism operators. As a result, the latest business survey must be seen as ancient history.”

NAB says the results “signal caution” about the likelihood of monetary policy being loosened in the near-term, although the odds of a rate cut are clearly higher in light of global economic conditions and financial market volatility.

“While near-term activity remains soft, we see a medium-term rebound in the Australian economy, aided by mining exports and investment in resources and infrastructure,” it says.

“We expect GDP growth of 1.9% in 2011, rising to 4.1% in 2012. Core inflation is expected to remain around 2.5% over the next year but drift above 3% by mid 2013.”

“As such, we expect the RBA will need to lift rates by late 2012. However, in the near term, the RBA is more dovish and there is now a 50/50 chance of a reduction in the cash rate in coming months if inflation remains subdued, and domestic demand and the labour market weakens further.”