Australia: Very healthy business conditions, but confidence not quite as exuberant - NAB

Analysts at NAB note that Australian business conditions (an average of trading conditions/sales, profitability and employment) rose a little further in Q4, from already elevated levels.

Key Quotes

“Business conditions rose to +15 in Q4, which is well above the long run average of +1 and is its highest level since early 2008. Business conditions were also positive in all industries for only the second time since early 2008. However, retail conditions continues to lag well behind the other industries, despite a notable improvement in the quarter.”

“The quarterly Survey continued to show a disconnect between business confidence (which dipped 2 points, to +6 index points) and business conditions, although the monthly Survey indicated a reconvergence late in the quarter following a spike in confidence. Yet, despite reporting a slight deterioration in confidence during Q4, firms still indicated even stronger investment intentions over the next 12 months – consistent with the steady rise seen in capacity utilisation rates. Firms that experienced a deterioration in confidence are largely pointing to wage costs, along with the business outlook and broader margin pressure as the primary factors behind the change.”

“Overall, most leading indicators improved in Q4 and are maintaining levels that suggest continued expansion in the next 12 months. Forward orders were up, as were expectations for business conditions in both 3 months and 12 months time. The capacity utilisation rate was up slightly (at 82.5% compared with long-run average of 80.6%), which is an encouraging sign for both future labour demand and capital expenditure. Consistent with that, both employment expectations and capex plans (next 12 months) strengthened. That said, growth in labour costs (a wage bill measure) steadied, but other indicators from the Survey are pointing to a tighter labour market. In particular, more firms indicated that it is more difficult to find suitable labour than it was a year ago – an indicator which tends to be highly correlated with the unemployment rate (p7 & 8).”

“Looking at the construction industry in more detail, residential construction conditions eased slightly, but remain quite positive despite concerns about oversupply, while other construction and construction services have been steadily improving.”

“The Survey is suggesting subdued inflationary pressures, but labour costs (a wage bill measure) are still well up from their recent lows. Product price inflation rose modestly, while price growth for final products was steady – yet the Survey’s margin index actually improved. Retail prices saw only modest growth in the quarter too, according to the Survey.”