Economy, Confidence Still Solid

By Glenn Dyer | More Articles by Glenn Dyer

Australian business continues to travel well, holding out hopes that the June 30 reporting season will be a good one.

Judging from the tenor of the country's major business confidence survey, profits are holding up, wage costs are not too much of a problem and confidence remains firm.

The National Australia Bank's (NAB) highly watched monthly business survey shows that the business conditions index was almost unchanged in June, inching down one point to 16 index points.

The confidence index was steady on 15 points during the month; a sign business expects the good conditions to continue into the new financial year that has just started.

The trading conditions sub-index rose one point to 24, while employment increased one point to 11 index points.

And while these were offset by a four point decline in the profitability sub-index to 13 points, the indication is still strongly positive

But NAB group chief economist, Alan Oster, has pointed out a couple of small worries but says that overall business conditions remained robust, with the three components of the conditions index – trading, profitability and employment – performing steadily in June.

Mr Oster said the underlying movements were beginning to show some significant changes.

"In particular, after a period of surprising "relative" weakness, mining confidence and conditions have surges – thereby boosting Western Australian activity further," Mr Oster said.

"That, no doubt, reflects renewed confidence in the global, and especially the Chinese, economic outlook."

He said recent equity market strength was creating boom conditions for businesses in the finance and business services.

But conditions and confidence in the recreational and personal services sector were declining, most likely due to the strong Australian dollar as well as stricter smoking bans.

"Particularly surprising, however, was the very sharp deterioration in retail confidence and conditions in June," Mr Oster said, adding that this will have to be watched closely

"Retail results were disappointing in June," according to the bank. The May retail sales figures from the Australian Bureau of Statistics showed a surprisingly dip, so if the NAB is right, then that downturn continued into June.

June though is now a fairly strong month for retailing with most chains and stores holding sales to clear end of financial year stocks.

Despite the strength in business conditions, Mr Oster said wage increases continued to remain "reasonably well behaved". Wages growth and economy – wide prices moderating recently but still edging up in year to June – 5.2 per cent and 2.8 per cent respectively.

But purchase cost inflation continues to edge down and retail prices remain stable at a low 2.1 per cent.

As a result, interest rates should remain on hold this year.

But he said there was a 40 per cent risk interest rates could rise if wages growth accelerated in the tight labour market conditions and added to inflation.

Mr Oster said the NAB expects inflation to be around 2.4 per cent at the end of the year, with the higher Australian dollar, strong productivity growth and slowing purchase costs helping to constrain inflation.

Overall, the Survey is consistent with underlying non-farm GDP growth of 3.5 per cent in the year to June – with domestic demand nearer 4 per cent. The Survey also points to further strength ahead.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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