• Business confidence and conditions: The NAB business confidence index rose from +4.7 points in December to +10.0 points in January (long-term average is +5.1 points). But the business conditions index fell from a 28-month high of +15.8 points to +7.2 points (long-term average is +5.3 points).

The business survey has broad implications for investors and the economy.

What does it all mean?

• The December business survey was a little too good to be true, with operating conditions reportedly the best in over two years. So some correction and consolidation was warranted. And that’s what the January survey has delivered.
• Importantly though, both business operating conditions and confidence levels are above longer-term averages. And these averages incorporate lows over the past 24 years such as the global financial crisis and highs such as the mining boom. So to be emerging from a pandemic with above-average results for the business sector is encouraging.
• Note that business is still not keen to take on debt. Around 60 per cent of businesses say that no borrowing is required.
• Courtesy of government and central bank stimulus, both sentiment and business conditions are strongest in the retail sector.

What do you need to know?

National Australia Bank Business Survey – January

• The NAB business confidence index rose from +4.7 points in December to +10.0 points in January (long-term average is +5.1 points). But the business conditions index fell from a 28-month high of +15.8 points to +7.2 points (long-term average is +5.3 points).
• The rolling annual average business confidence index rose from -11.2 points to -10.1 points in January. The rolling annual average business conditions index lifted from -5.0 points to -4.2 points.
• The survey was conducted in the period January 18 to February 1, 2021 across 400 firms.
• Key Components: The index of trading conditions fell from +21.8 points to +11.1 points; employment fell from +10.1 points to +2.8 points; profitability fell from +12.8 points to +8.6 points; forward orders eased from +1.8 points to +1.5 points; stocks rose from -0.8 points to +1.3 points; exporter sales improved from ‑17.4 points to ‑14.6 points.
• Inflationary indicators: The monthly reading of labour costs rose at a 0.6 per cent quarterly rate in January after rising 0.9 per cent in December. Purchase costs were up 0.7 per cent (December: +1.0 per cent). Final product prices were up 0.1 per cent (December: flat). Retail prices were up 0.7 per cent (December: +0.6 per cent).
• Capacity utilisation rose from 80.8 per cent to an 11-month high of 81.0 per cent (note that 81.0 per cent is the long-term average).
• The proportion of firms reporting that they did not require eased from 60 per cent to 59 per cent.
• On the regions NAB noted: “Conditions declined in all mainland states, led by a very sharp fall in South Australia. Nonetheless, in trend terms, conditions remain more favourable in the smaller states with Victoria and NSW lagging. The rise in confidence was led by a gain in Queensland (up 17 pts) while Tasmania and NSW also saw gains. Western Australia and South Australia saw declines. In trend terms, confidence is highest in NSW, Victoria and Western Australia.
• On industries NAB noted: “The decline in conditions was broad-based across industries with the notable exception of recreation & personal, which is slowly improving as restrictions ease. Wholesale led the decline in the month, though mining, manufacturing also saw sizeable declines. Overall, in trend terms conditions remain strongest in retail and weakest in construction followed by recreation & personal.”
• “The rise in confidence was led by an increase in recreation & personal, though finance & business services, wholesale and manufacturing also rose. Mining and transport & utilities declined in the month. Overall in trend terms, recreation & personal continues to lag the other industries, while retail and wholesale are most optimistic.”

What is the importance of the economic data?

• 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 investors?

• Economic recovery is well underway. But as the Reserve Bank warns, the recovery process is bumpy and out is uneven. And this is likely to exist for most of 2021 and into 2022 – that is, until the vaccine rollout is well underway and foreign borders start to open up.

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