The surprise two month improvement in business conditions found by the National Australia Bank in its monthly surveys, seems to have petered out, according to the latest survey from the bank.
Surprise and sharp improvements in business conditions for a host of industries and states were reported in the December and January monthly surveys from the NAB. So strong was the improvement that business conditions in January were close to three year highs.
But in the February survey, released yesterday, the bank said business conditions slumped, reversing and losing about half of the gains since the federal election in September.
But somewhat oddly, business confidence remained solid and slightly above trend levels in February, "suggesting" the bank said "firms remain hopeful of a recovery despite mixed signals on business activity."
Business conditions fell to zero in February from 5 points in January and 4 points in December.
Business conditions drop sharply in February
Source: NAB
The NAB said business confidence slipped back to its December levels of 7 points after rising to 9 points in January.
"The previous improvement in conditions appeared to move ahead of itself given the broader economic environment.
"Consequently, the fall in conditions [in February] probably reflected a realignment of conditions with underlying fundamentals," NAB’s chief economist for Australia Alan Oster said in comments in the survey.
"While conditions have given back around half of their post-election gains, lower interest rates should help trading and sales conditions improve."
NAB said its indicators pointed to "little improvement" for business conditions over the next few months. Forward orders have softened while firms have resumed de-stocking, the survey found.
The continued weakness in employment conditions pointed to the "jobless nature" of Australia’s economic recovery, Mr Oster said.
Employment conditions remain tough in most industries, particularly wholesale, while recreation and personal services the only sector in positive territory on the index.
"Sales and employment fell markedly during the month, with the latter pointing to very weak labour market conditions (nearly all post election gains reversed) – and a jobless recovery.
"Manufacturing conditions deteriorated sharply, as did “bellwether” wholesaling conditions.
"Near-term outlook weaker with forward indicators softening. Inflation pressures well contained due to limited upstream pressures.
"Economic growth forecasts unchanged. Final RBA cut to occur in late 2014, with unemployment still expected to rise to 6½% by late 2014 and stay “higher for longer”," the NAB forecast.
Business confidence remains resilient
Source: NAB
Business conditions by industry. The fall in conditions was driven largely by a sharp deterioration in manufacturing (down 13 points), which largely unwound the surprising improvement recorded the previous month.
Wholesale (down 5 points), finance/ property/ business services (down 3 points) and recreation & personal services (down 2 points) also deteriorated in the month, although conditions remain quite strong in the last of these. Transport & utilities was the only industry to record an improvement in business conditions during the month.
Conditions are still highest in the services sectors – with consumers more prepared to spend on services (especially those considered non discretionary e.g. utilities, education and housing costs). Recreation & personal services are highest (+12 index points), followed by finance/ property/ business services (+2 points).
Conditions remain very poor and deteriorating in wholesale (-17), which points to ongoing weakness in the broader economy. The mining sector is clearly shifting into the next phase of the mining boom, with firms reporting solid exports despite weak conditions for the industry (-7 points).
Business conditions by state. Business conditions deteriorated across a number of mainland states in the month. The most significant decline occurred in Victoria (down 8 points to 0 index points), followed by NSW (down 7 points to -1 index points). Western Australia also reported weaker conditions (down 5 points to -1 index points).
This suggests that the major eastern states felt the brunt of the deterioration in manufacturing conditions during the month, while WA continues to be held back by a softer mining sector.
Nevertheless, conditions remain weakest in the state of Queensland, despite an improvement in the month (up 3 points to -2 index points); drought conditions, retail headwinds and flow-on effects from the softer mining sector, kept it the worst performing state.
Surprisingly, South Australia is reporting the highest conditions index (+4 points) of the mainland states, despite the underperformance of its economy in recent years, and headwinds to local manufacturing and mining sectors.
Business confidence by state. Confidence remains positive in all mainland states, despite falls in the month for Queensland (down 4), NSW (down 3) and SA (down 1).
Victoria (up 3) and WA (up 1) recorded rises. Despite the weak business conditions facing Queensland firms, the state is reporting the equal highest degree of confidence of the mainland states in levels terms (+9 index points); matched by WA. Firms are least confident in SA (+5).
