NAB SPONSORED CONTENT: Quarterly Business Survey – September

Businesses become more confident in the September quarter. This appears to be driven by political factors, the lower AUD and rates and stronger asset markets.

Businesses become more confident in the September quarter. This fundamentally appears to be driven by political factors – albeit the lower Australian dollar and rates, together with stronger asset markets would have helped. But these factors have not yet boosted business conditions, which tracked lower to the weakest level in four years. Forward indicators remain subdued. Capex expectations also weak, especially in mining. Prices growth implies soft underlying inflation in Q3.

Business confidence lifted to its highest level in two years, despite business conditions slipping into even deeper negative territory in the September quarter.

Better sentiment was felt across most industries and states. Fundamentally, it appears to reflect a reaction to the political change associated with the federal election in September. Better Chinese data may have also helped trade-exposed firms. Also helping are lower rates and the currency. However, a special question shows that the lower Aussie dollar is squeezing wholesale and retail margins.

Business conditions deteriorated to their lowest level in more than four years. The survey points to six-month annualised GDP growth in the September quarter of around 2.74 per cent (i.e. below trend). While forward orders and capacity utilisation lifted a little in the quarter, they remain at subdued levels, and combined with even weaker employment conditions and stocks, suggest little improvement in near-term demand.

At the industry level, business conditions weakened to a 14 and a half year low in mining. Weak conditions were also sustained in manufacturing, retail, wholesale, transport & utilities and construction. Personal services continued to outperform all other industries, while property services also performed strongly, possibly helped by better housing market activity. Conditions were especially weak in WA, Queensland and SA, where the mining slowdown continues to gain momentum.

Business investment intentions (next 12 months) weakened marginally, pointing to only modest investment growth over the year ahead. Near and longer term employment expectations also remain soft, consistent with NAB’s view for rising unemployment over the next year. Lack of demand is expected to be the largest constraint on profitability (next 12 months) while tax & government policy remain important.

Product prices inflation lifted a touch in the quarter, recording annualised inflation of just 0.4 per cent (0.1 per cent in the quarter), after no growth in prices in the first half of 2013. Retail price inflation was a touch stronger in the quarter, but still suggests little upside to Q3 underlying CPI. Labour and purchase costs growth remain modest, and when combined with soft price inflation, resulted in increased pressure on margins.

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