The NAB business confidence index fell from -2.2 to – 2.7 in June – a ten-month low.
- Business conditions improved from a 3-year low, up from -3.9 to -1.
- The survey of over 300 businesses took place from June 19 – June 29.
- Across the sub-indices, profitability improved from a three-year low, the index of trading conditions recorded a modest improvement, however forward orders contracted for the 15th straight month and held at a three-year low.
- Despite lower attractive interest rates, demand for credit weakened sharply. The proportion of firms reporting that they did not require credit rose from 47 per cent to 63 per cent in June.
- Inflationary pressures remain well contained. The monthly reading of labour costs eased from a 0.9 per cent to a 0.7 per cent quarterly rate in June – “consistent with the weakness in employment conditions”.
What does it all mean?
- Any hope of a revival in business sentiment has been eroded after the latest business survey. The latest business survey is certainly disappointing, particularly given that it took place in late June well after the back to back rate cuts. Business confidence deteriorated to the weakest levels in 10-month, while conditions bounced of three year lows. It is clear that business remain decidedly worried about current economic conditions. The tough domestic trading conditions coupled with the downside risks to global growth and the concerns surrounding the Europe Union are dampening confidence and increasing caution.
- Interestingly across the sub-indices, profitability continued to go backwards while more worryingly forward orders slumped to three-year lows. And the latest result comes despite the Federal Budget handouts which began in earnest in late May. Over coming months the Reserve Bank would be hoping that the deep rate cuts would provide a positive shock to confidence and support activity but in the short-term it is yet to have the desired effect.
- It was particularly disappointing to see that despite the attractive lower interest rates on offer businesses were not interested in increasing borrowings. The substantial cut in borrowing rates over the past few months have not significantly altered perceptions on borrowing. The proportion of firms reporting that they did not require credit rose from 47 per cent to 63 per cent in June. In other words almost two thirds of all businesses are not interested in seeking loans. Structurally the domestic economy remains sound, however the patchy nature of the recovery is ensuring that businesses remain conservative and use existing cash facilities to further development and investment.
Looking forward, the rate cuts and slide in fuel prices should provide consumers with more breathing space in the household budget. A most pick up in spending is likely to take place over the medium term. And after a lack of borrowing over the past year, Australian consumers and businesses are likely to be tempted by the lower rates on offer as confidence improves.
What do the figures show?
- The National Australia Bank business confidence index fell from -2.2 to – 2.7 in June – a ten-month low. The business conditions index improved from -3.9 to -1. Both readings are well below long-term averages.
- The index of trading conditions rose from -0.6 to 2.7; profitability improved from a three-year low of -6.2 to -1.1; employment eased from -3.7 to -4.3; and forward orders fell from -4.3 to -7.9 – a three-year low and marked the 15th straight month that forward orders have contracted.
- Inflationary pressures remain well contained. The monthly reading of labour costs eased from a 0.9 per cent to a 0.7 per cent quarterly rate in June – “consistent with the weakness in employment conditions”. Prices rose at a 0.2 per cent quarterly pace. Retail prices were going backwards, down by a -0.1 per cent quarterly rate in June. Purchase costs rose at a 0.4 per cent quarterly rate in June, down from the 0.5 per cent growth in May.
- Capacity utilisation lifted marginally from 79.9 per cent to 80.6 per cent in June. The long-term average stands at 81.2 per cent.
The proportion of firms reporting that they did not require credit rose from 47 per cent to 63 per cent in June.
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.
What are the implications for interest rates and investors?
Consumers are cautious about spending, so businesses are keeping a tight rein on costs. The tame reading for labour costs, retail prices and purchase costs keeps the door open to another rate cut. Companies are discounting heavily, financial conditions remain tight, the non-mining economy is largely only chugging along at present and there are still downside risks to the global economy. The negative momentum is clearly why the Reserve Bank slashed rates over the last couple of months.
CommSec expect the Reserve Bank to cut rates once more in August to support confidence and insulate the domestic economy from the ongoing European debt crisis.
11 July 2012