Australia: Business conditions drop but are still elevated, tentative signs of wage growth - NAB

Last month’s surprise spike in Australia’s business conditions was more than unwound in November, although that was partly expected, according to analysts at NAB.

Key Quotes

“Despite the drop, business conditions remain well above the long-run average and are at solid levels across most of the economy. Forward orders were stronger as well. The construction industry is looking particularly good, but the retail sector is still lagging behind.”

“Additionally, most states are seeing very solid business conditions, although WA is only moderately positive. The Survey’s employment index held steady at previous levels, pointing to adequate jobs growth that should further lower the unemployment rate. Wage costs picked-up this month, coinciding with reports from some firms that wage costs are impacting confidence.”

“Last week’s National Accounts again highlighted the growing divide between the relatively upbeat business sector and seemingly restrained households. The NAB Survey suggests that trend may continue going into Q4, and we are continuing to watch the softer trends in confidence and the retail sector, as both can have significant implications for the outlook.”

“Business conditions more than gave back the sharp gains from last month, with the business conditions index falling 9 points to +12 index points – albeit still well above the long-run average (+5). Meanwhile, business confidence is currently in line with long-run average levels, at +6 index points (down from +9 last month), although there has been a notable downward trend in the series since around the middle of the year.”

“According to Alan Oster, NAB Group Chief Economist “we expected to see last month’s spike in business conditions unwound fairly quickly as it both came as a bit of a surprise, and was also out of sorts with what we were seeing in some of the other leading indicators from the survey, such as forward orders. But even after this decline, business conditions are still very much above the long-run average and suggest to us that Australian business are quite happy with how things are going. That said, we are paying close attention to what now appears to be a downward trend in business confidence as that could naturally have some implications for decisions around hiring and investment. Meanwhile, forward orders – which have had a close relationship with non-mining activity – were stronger this month”.”

“Overall, there was nothing in this month’s Survey that would prompt us to alter our view of the Australian economy. We remain cautiously optimistic that Australia will see temporarily above trend economic growth in coming quarters, and while there are still some significant challenges to the outlook, support from business investment and infrastructure construction should be enough to prompt the RBA to consider a gradual removal of emergency policy stimulus. We maintain our expectation for the first RBA hike to come in the second half of next year, but only if the labour market and wages improve further” said Mr Oster.”