Business conditions suffer setback amid more global uncertainty

Business conditions weakened in the June quarter, according to NAB’s Quarterly Business Survey, with conditions deteriorating across most industries, while confidence also took a hit.

The survey, which covers more than 900 firms across the business sector, shows the business conditions index weakened in the June quarter, down four points to -1 index point.

That’s two points below the long-term average of +1 point since 1989.

Part of the deterioration may reflect a weakening in overseas demand for exports due to global uncertainty, as well as a material softening in domestic demand, the survey said.

Meanwhile, the impact on spending – from the Reserve Bank’s three interest rate cuts since November last year – is yet to appear, according to NAB.

NAB economist Alexandra Knight says the divergence between the mining and serviced-based sectors, and the consumer and trade-dependent sectors, narrowed a little in the June quarter.

“[However,] conditions deteriorated across most industries, and were particularly weak in manufacturing and construction,” Knight says.

“In contrast, conditions were strongest in recreation and personal services, mining, and transport and utilities.”

Business conditions deteriorated across all mainland states in the June quarter, with the sharpest deterioration recorded in WA. This is consistent with the recent weakening in mining conditions.

Nonetheless, conditions remained the strongest in WA overall. In contrast, conditions among the mainland states were weakest in Victoria and Queensland.

Conditions in Tasmania improved moderately, but remain “worryingly weak” in levels terms.

Business confidence also deteriorated in the quarter, and is now well below the long-term average.

“At the time the survey was conducted, business confidence appeared to have reacted negatively to the uncertainty emanating from overseas economies,” the survey said.

“The quarterly business survey was undertaken just prior to the Greek election… when financial volatility was high.”

“It appears that even the lure of lower interest rates was unable to lift sentiment.”

“Furthermore, the sizeable depreciation of the Australian dollar over the three-month period appears to have provided little relief to those industries exposed to currency movements.”

“Overall, confidence readings in quarterly business survey[s] are broadly in line with monthly readings.”

Surprisingly, retail was the only industry to report an improvement in business confidence in the June quarter.

In contrast, confidence deteriorated sharply in mining, construction, and recreation and personal services.

But despite heavy falls, mining – along with recreation and personal services – remain the most optimistic overall.

Retail is also relatively optimistic, expecting activity to remain broadly unchanged in the September quarter.

In contrast, all other industries anticipate a contraction in activity in the September quarter. Confidence is weakest in wholesale, transport and utilities, and construction.

Meanwhile, WA is the only state expecting activity to improve in the September quarter, while Victoria and South Australia are the least confident.