Business caution on global jitters; Biggest fall in petrol price in 7 years

NAB Business survey; Weekly petrol prices

• Business survey: The NAB business conditions index eased from +9.5 points to +7.0 points in December. And the business confidence index eased from +5.2 points to +2.5 points. The survey was conducted from January 11 to 15.
• Petrol: According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 6.3 cents to 113.7 cents per litre in the week to January 24 – the biggest weekly fall since November 30 2008.

What does it all mean?

• There will always be short-term bumps along the journey taken by Aussie businesses. And while business confidence and conditions both eased a touch in response to recent global jitters, the long-term position hasn’t changed. In fact the annual average of the business conditions index hit a fresh 7-year high in December.
• Since the business survey was held, oil prices and global sharemarkets have recovered from lows, central banks have vowed to maintain economic stimulus and Chinese economic data has been received without an adverse reaction. And at home, economic data has remained positive including figures showing record tourist arrivals, record car sales, record dwelling starts and above-average retail spending growth.
• The petrol price slumped last week but many are still asking why it isn’t lower? In large part it gets down to a weaker currency. A year ago the Aussie dollar was near US81-82 cents. Today the Aussie is near US69-70c. The Singapore gasoline price is around similar levels in US dollar terms, but it is higher than a year ago in local terms due to a weaker currency.
• The gross retail margin (gap between the pump price and terminal gate price) has trended higher over time. But the gap is only around 3-4 cents a litre higher than a year ago, so this explains only a small part about what is going on with the pump price.
• Importantly the petrol price did come crashing down last week – down over 6 cents in a week and the biggest weekly fall since November 2008. But the sharp 9-10 per cent lift in crude oil prices on Friday may suggest that further downside at the petrol pump is limited.
• However the motorists that would feel aggrieved at present are those that need to fill up with diesel. The terminal gate price averaged 90.2 cents last week whereas average pump prices are 119.4 cents a litre – a gap of 29.2 cents a litre. By contrast, the gross retail margin for unleaded petrol last week was just over 10 cents a litre.

What do the figures show?

National Australia Bank Business Survey:

• The NAB business conditions index eased from +9.5 to +7.0 points in December. But the rolling annual average rose from +7.5 points to a 5-year high of +7.7 points. And the business confidence index eased from +5.2 points to +2.5 points. The survey was conducted from January 11 to 15.
• NAB noted: “The NAB Business Survey suggested a slight easing in business conditions in December, but showed little signs (beyond normal monthly volatility) of a fundamental weakening in the non-mining recovery.
• “The change in business conditions varied considerably across industries as construction and retail experienced the brunt of the decline, with the former now posting the weakest conditions (at -8 index points). Ongoing declines in mining investment could explain construction weakness, however, a pullback in conditions for both NSW and Vic may suggest a moderation elsewhere (including the residential space). Nevertheless, all but 2 of the 8 major industry groups (construction and mining) have reported positive business conditions. Services sectors (outside retail) held up reasonably well during the month, remaining notable outperformers.”
• “Business conditions weakened in Vic, WA and NSW during the month, but looking through the monthly volatility shows conditions remaining very elevated in the major eastern states. In contrast, trend conditions are negative for WA and remain relatively subdued in SA and Qld. Despite this, confidence in Qld has remained at high levels, and are positive in SA. Confidence in NSW and Vic dropped in December, but remains positive in trend terms.”
• Components. The index of trading conditions fell from +15.7 to +13.0; employment eased from +1.7 points to +0.2 points; profitability eased from +11.2 points to +8.2 points; forward orders rose from +2.3 points to +3.6 points.
• Inflationary indicators were mixed in December. The monthly reading of labour costs rose at a 0.7 per cent quarterly rate in December, up from 0.5 per cent in November and 0.4 per cent in October. Purchase costs rose at a 0.5 per cent quarterly rate in December, after a 0.7 per cent rise in November. Final product prices were up by just 0.3 per cent in December, similar to the lift in November. And retail prices were up by 0.5 per cent in December after 0.6 per cent gains in October and November.
• Capacity utilisation eased from 80.8 per cent to 80.0 per cent, just below the long-term average of 81.0 per cent.
• The proportion of firms reporting that they did not require credit lifted from 52 per cent to 72 per cent in December.

Petrol prices

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 6.3 cents per litre to 113.7 cents per litre in the week to January 24. The metropolitan petrol price fell by 8.3 cents to 110.6 cents per litre while the regional price fell by 2.3 cents to 119.9 cents per litre.
• The national average Australian price of diesel petrol fell by 2.0 cents to 119.4 cents per litre in the week to January 24. Last week the metropolitan price fell by 2.0 cents to 118.7 c/l, while the regional average price fell by 2.0 cents to 120.0 c/l.
• Average unleaded petrol prices across states and territories over the past week were: Sydney (down by 13.5 cents to 105.7 c/l), Melbourne (down 6.5 cents to 107.1 c/l), Brisbane (down 10.7 cents to 116.6 c/l), Adelaide (down 7.2 cents to 102.4 c/l), Perth (down 2.1 cents to 118.1 c/l), Darwin (down by 0.3 cents to 124.9 c/l), Canberra (down 0.4 cents to 125.7 c/l) and Hobart (down by 1.5 cents to 128.5 c/l).
• Today the national average wholesale (terminal gate) unleaded petrol price stands at 102.1 cents per litre, down 2.6 cents per litre on a week ago. The terminal gate diesel price stands at fresh 11-year lows of 88.4 cents a litre, down 3.1 cents over the week.
• The difference between the weekly average retail unleaded petrol price and the weekly average wholesale terminal gate price was 10.2 cents a litre last week, down from 13.7 cents in the previous week and 15.5 cents in the week to January 10.
• Last week the key Singapore gasoline price rose by US92 cents or 1.9 per cent to US$49.87 a barrel. In Australian dollar terms the Singapore gasoline price rose by 73 cents a barrel or 1.0 per cent to $71.18 a barrel or 44.77 cents a litre. The lift in the Aussie dollar price was from the lowest price recorded in the past year and the second lowest result in seven years.
• MotorMouth records the following retail prices for capital cities today: Sydney 101.8c; Melbourne 104.0c; Brisbane 117.2c; Adelaide 98.8c; Perth 112.1c; Canberra 118.5c; Darwin 124.6c; Hobart 128.5c.

What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.
• The monthly National Australia Bank business survey is valuable in providing a timely reading about 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?

• The latest NAB business survey offers predictable results with business conditions and confidence softening in response to volatile global financial markets. Still, the results are actually a little firmer than what you would have expected given the amount of volatility on equities and commodities markets.
• The Reserve Bank maintains a conditional easing bias. That is, should the economy require additional stimulus, the Reserve Bank indicates that it is well positioned to cut interest rates again.
• Australian families are saving on average just over $35 a month in filling up the car with petrol compared with July last year. The extra dollars would most likely be viewed as windfall gains, boosting discretionary spending, especially at cafes, restaurants and fast food outlets.
•  The lower petrol price will serve to keep domestic inflation at low levels.