Strong dollar and weak demand chip away at confidence
Business conditions fell to -3, down from -2 in January, as firms recorded modest falls in profitability, although employment conditions improved, the National Australia Bank's monthly survey of more than 400 firms found.
"Perhaps most concerning is the slump in forward orders, with the index declining to its lowest level since May 2009," NAB chief economist Alan Oster said.
"Combined with still low capacity utilisation, stocks and employment and capital expenditure readings, forward indicators imply little improvement in near-term demand."
Conditions in the retail, wholesale, recreation and personal services sectors picked up, while mining activity lifted as commodity prices rose. Conditions in the construction and manufacturing industries remained poor. JPMorgan economist Tom Kennedy said the survey showed domestic conditions remained challenging despite an improvement in the global environment.
At the same time, the market continued to lower expectations of a rate cut next month. Markets were pricing an 18 per cent chance of an interest rate cut of 25 basis points in April, and a 75 per cent chance of a 25 basis points cut for the rest of 2013, Credit Suisse data showed.
Expectations of an interest rate cut for the rest of 2013 are at their lowest since August 2011, according to the Reserve Bank's interest rate swap rates.
NAB also revised its rates forecast to 50 basis points (for an official cash rate of 2.5 per cent) for the rest of the year, instead of cuts totalling 75 basis points.
Meanwhile, the retail sector was forecast to grow 2.2 per cent for the 2013 financial year after a disappointing 2012, as lower interest rates took effect, consumer confidence grew and households' savings rates levelled out, Deloitte Access Economics said in a report.
Frequently Asked Questions about this Article…
The National Australia Bank (NAB) monthly survey of more than 400 firms found business conditions fell to -3 in February (down from -2 in January). Firms reported modest falls in profitability, though employment conditions improved slightly.
The article says the strong Australian dollar, combined with weak demand in non‑mining sectors, has chipped away at business confidence and helped push business conditions down, particularly by reducing demand and profitability for some firms.
NAB chief economist Alan Oster highlighted a slump in forward orders to their lowest level since May 2009. Low forward orders, together with weak capacity utilisation, stock levels, employment and capital expenditure readings, imply little improvement in near‑term demand — a warning sign for future sales and investment.
According to the survey, retail, wholesale, recreation and personal services picked up, and mining activity lifted as commodity prices rose. By contrast, construction and manufacturing conditions remained poor.
Credit Suisse data in the article showed markets were pricing an 18% chance of a 25 basis point rate cut in April and a 75% chance of a 25 basis point cut over the rest of 2013. Reserve Bank interest rate swap rates indicate expectations for cuts this year are at their lowest level since August 2011.
NAB revised its rates forecast to a total of 50 basis points of cuts for the rest of the year (implying an official cash rate around 2.5%), down from an earlier view of cuts totalling 75 basis points. That reflects weaker near‑term demand and reduced odds of larger rate easing.
Yes — despite modest falls in profitability, the NAB survey found employment conditions improved in February, suggesting hiring remained somewhat resilient even as overall business conditions softened.
Deloitte Access Economics forecast retail sector growth of 2.2% for the 2013 financial year after a disappointing 2012. They attributed the improvement to lower interest rates taking effect, rising consumer confidence and households' savings rates levelling out — factors everyday investors watch for consumer‑facing company performance.
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