The NAB business confidence index rose from +3.1 to +4.0 in January, below the long-run average of +6.4. Business conditions improved from +0.1 to +2.1, below the long-run average of +5.6. The survey of 400 businesses took place from January 19 to February 2.
- No finance required. The proportion of firms reporting that they did not require credit rose from 64 per cent to a record 67 per cent in January. In other words around two thirds of all businesses aren’t seeking loans at present.
- More good news for farmers: After a record winter crop, the Federal Government’s main commodity forecaster, ABARES, expects summer crop production to rise by 18 per cent. But some producers in northern NSW and southern Queensland have “suffered hardship because of the untimely heavy rainfall and flooding.”
What does it all mean?
- There must be a lot of businesses sitting on their hands at present, not keen to employ, borrow or invest. And the lack of interest in finance is quite stunning. Around two in every three businesses aren’t seeking external finance at present. Either firms aren’t keen to take on debt, internal sources of funding are healthy, or firms don’t want to take on new projects at present.
- It is not as if confidence has totally dried up, rather businesses would prefer to hold fire at present – no doubt waiting to see how the European situation and domestic political situation play out. It appears that the caution expressed by consumers is infectious, with businesses also seemingly blinded by the headlights of oncoming traffic.
- The Reserve Bank Board may now see the February meeting as a missed opportunity. Credit ratings agency Moody’s has downgraded the ratings of nine European economies, raising doubts about whether the crisis is stabilising. At the same point, funding pressures have forced banks to lift rates. And it’s clear from the latest business survey that two rate cuts have done little to boost activity levels and confidence.
- Certainly the latest business survey shows that inflation is well contained, giving scope for the RBA to cut rates again.
Australia still has a multi-speed economy with mining well in front from transport while manufacturing and retail sectors are depressed. But cracks are appearing in the high-flying mining sector with the business confidence slumping from +11 to -8 in the latest month.
What do the figures show?
National Australia Bank Business Survey:
- The National Australia Bank business confidence index rose modestly from +3.1 to an 8-month high of +4.0 in January. The business conditions index improved from +0.1 to a 4-month high of +2.1. Both readings were below long-term averages.
- The index of trading conditions rose from +1.2 to +1.3; profitability weakened from -1.3 to -3.7; employment eased from +1.2 to +0.8; but forward orders improved from -1.6 to -0.6.
- It was the 10th straight month that forward orders contracted.
- Inflationary pressures are well contained. The monthly reading of labour costs fell from a quarterly rate of 1.0 per cent in December to 0.7 per cent in January. Prices fell at a 0.1 per cent quarterly pace, down from 0.1 per cent growth in December. And retail prices fell at a 0.6 per cent quarterly rate in January. Purchase costs rose at a 0.2 per cent quarterly rate in January, following 0.5 per cent growth in December.
- Capacity utilisation rose from 80.8 per cent in December to 81.3 in January – largely in line with the long-term average but below the decade average of 81.6 per cent.
- The proportion of firms reporting that they did not require credit rose from 64 per cent to a record 67 per cent in January. In other words just under two thirds of all businesses aren’t seeking loans at present.
ABARES Crop Report:
- The Federal Government’s main commodity forecaster, ABARES, expects summer crop production of around 5.4 million tonnes (mt) in 2011/12, up 18 per cent on a year ago. The forecasts reflect higher yields for cotton and grain sorghum while area planted is expected to be unchanged at 1.6 million hectares.
- There was a record Australian winter crop in 2011-12 at 45.4 million tonnes, a 7 per cent increase from 2010-11.
- ABARES notes “Of the major winter crops in 2011-12: wheat production is estimated to be a record 29.5 million tonnes, compared with 27.9 million tonnes in 2010-11; barley production is estimated to have reached 8.6 million tonnes, 5 per cent higher than 2010-11; and canola production is estimated to have risen by 16 per cent to a record 2.8 million tonnes.”
- Of the summer crop, ABARES reports: “Cotton and grain sorghum production is forecast to increase by 20 per cent and 13 per cent to around 1.1 million tonnes and 2.3 million tonnes, respectively, with rice production forecast to increase by 27 per cent to 923,000 tonnes.”
What is the importance of the economic data?
- The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
- The Federal Government’s commodity forecaster, ABARES, produces a Crop Report four times a year. The report is useful in gauging conditions in Australia’s rural economy and assessing prospects for key companies dependent on the agricultural sector.
What are the implications for interest rates and investors?
- The Reserve Bank is another step closer to cutting rates again following today’s developments. The Reserve Bank has failed to outline a strong argument supporting its decision to keep rates unchanged at the start of the month.
- According to the NAB, business conditions are flat in all most states. The only exceptions are Western Australia where business conditions are solid and Tasmania, where conditions are decidedly soft.
- While Mining is generally painted as the strongest industry sector by some margin, the latest Crop Report shows that the rural sector continues to thrive, notwithstanding untimely floods affect northern NSW and Queensland. Most farmers will tell you they much prefer the rain to prolonged drought conditions. The income from the record winter crop will be spent, providing a much needed boost to economic conditions across rural and regional Australia.